The Worst Economy Of Our Lifetime, pt. II

From The Washington Post:

Concern about the economy, the war in Iraq and growing dissatisfaction with the political environment in Washington all contribute to the lowest public assessment of the direction of the country in more than a decade. Just 24 percent think the nation is on the right track, and three-quarters said they want the next president to chart a course that is different than that pursued by Bush.

...

Dissatisfaction with the war in Iraq remains a primary drag on public opinion, and Americans are increasingly downcast about the state of the economy. More than six in 10 called the war not worth fighting, and nearly two-thirds gave the national economy negative marks. The outlook going forward is also bleak: About seven in 10 see a recession as likely over the next year.

Yet last week the economic news was upbeat. The U.S. economy grew 3.9 percent and the economy added 166,000 jobs. Shouldn't people be happy about those developments?

The answer is no they shouldn't. As I noted in the first installment in this series, job and wage growth for this expansion is poor at best. Simply put, if you hadn't had a meaningful raise for the duration of "greatest story never told" you'd be frustrated, too. But that poor job and pay growth only tell part of the story. The bottom line is the underpinnings of the Bush economy are terrible -- and they are starting to come home to roost in a big way.

Before I move forward I'd like to address a point brought up in the first article in this series. Several people commented that the recession of the early 1980s was in fact the worst economy of our lifetime. I will admit that I was alive and well during that time, although I was just starting high school. While I would love to tell you I was economically aware at that time, the truth is I was more interested in playing guitar (stealing licks, playing in bands) going to parties and in general being a high school kid. I have no economic recollection of that early 1980s. So for people who were alive and, well, struggling during that time it may have been the worst economic period of their lives. But for me, watching friends struggle with getting by while being told everything is great in Republican-land for the last seven years has lead me to the conclusion that the current expansion is a cruel joke played on the vast majority of Americans. As the poll numbers indicate, I am far from alone; most Americans feel that way.

The question is, why? One of the primary reasons is the financial underpinnings of this expansion are poor. But let's back-up to 2001. According to the Bureau of Economic Analysis, the personal savings rate was .46 percent in the fourth quarter of 2001. Another way to state this statistic is Americans were spending 99.5 percent of their personal income in the fourth quarter of 2001. Now, let's look at the Census Bureau's median income statistics. Here is a chart from their latest national income report:

Notice how the median national income has stagnated? Yet over the duration of this expansion, personal consumption expenditures have increased 18.34 percent in chained (inflation-adjusted) dollars. So, at the beginning of this expansion people were already spending everything they made on a weekly basic. Over the last seven years income has stagnated, yet people have increased their purchases by 18.34 percent. Where did all this new money come from?

Tons of debt. Here is a chart compiled from information from the Federal Reserve's Flow of Funds Report.

Let's put some figures on that chart. In the fourth quarter of 2001, total household debt outstanding totaled $7.680 trillion dollars. In the second quarter of 2007, total household debt outstanding increased to $13.331 trillion -- a 73.56 percent increase.

Let's place those figures in perspective.

In the fourth quarter of 2001, total household debt was 75.10 percent of GDP. In the second quarter of 2007 it was 96.82 percent

In the fourth quarter of 2001, total household dent was 102 percent of disposable income at the national level. In the second quarter of 2007 it was 129.62 percent of personal income at the national level.

Now, there is no economic magic line that says "debt above this level is bad." However, let's look at some recent headlines from the financial services industry to see where this debt has gotten us.

From Bloomberg:

Stocks fell in Europe and Asia after Citigroup Inc.'s announcement of as much as $11 billion in writedowns suggested financial companies may face more losses. U.S. index futures retreated.

From Reuters:

Merrill Lynch & Co Inc (MER.N: Quote, Profile , Research) reported $7.9 billion in net write-downs for the third quarter on Wednesday as shaky risk management and bad bets on subprime mortgages and collateralized debt obligations triggered the company's first quarterly loss in six years.

....

Merrill was the only big Wall Street firm to post a third-quarter loss. And its write-downs -- before hedges -- was bigger than the combined $3.6 billion in write-downs and charges recorded by rivals Goldman Sachs Group Inc (GS.N: Quote, Profile , Research), Bear Stearns Cos Inc (BSC.N: Quote, Profile , Research), Morgan Stanley (MS.N: Quote, Profile , Research) and Lehman Brothers Holdings Inc (LEH.N: Quote, Profile , Research).

And as this chart from the IMF shows, we have at least another three years of resets to go through before we're in the clear:

The problem with this debt is we have now partially crippled our economy going forward. The U.S. economy relies on the credit markets for a host of necessary economic activities. But those markets are not functioning smoothly right now. And the chart from the IMF indicates they won't function smoothly for some time into the future. As a result, the U.S. economy will limp alone for the foreseeable future as the credit markets work-out their self-imposed problems. And that's not good for anyone.

 

Comments

[olephart]

03:59 PM on 11/06/2007

I made a fornicatin­g fortune in the silver market today. I couldn't have done it without George W. Bush and his destructio­n of the US Dollar. Thanks George! Here's an investment tip to all of you in the Northeast, it might be cheaper to burn one dollar bills for heat rather than fuel oil this winter.

[cssinclair]

02:50 PM on 11/06/2007

The problem with our credit markets are the predatory practices of the lenders.
I am the president of a credit management and debt settlement firm. We see our clients who through their own financial mismanagem­ent being victimized by creditors. Many of our clients who’ve maxed out their credit cards continue to get high rate offers, why? Because the credit industry has learned that the most profitable client is one that is in credit trouble and will never make more than the minimum payment. One lender told me their favorite client is one that just came out of bankruptcy­. I was stunned but he explained that these clients love to use credit and aren’t afraid of minimum payments or late fees. These are client who typically get charged 30%, factoring in late fees it could go as high as 100%.

Similar predatory practices are widespread in the mortgage industry. While it easy to blame congress the real problem is as a nation how we use credit and who we extend it too.

In the past few months my client base has really started to change and we now are seeing a lot of homeowners who a year ago could have done a cash out refi but now cannot qualify and are paying their mortgage with credit cards. A year ago my average client had $20,000 in unsecured debt, now it’s almost $40,000. If you look at the increase in credit card use just since August you will see a very disturbing trend. People are living of their credit cards. This trend is going to lead to some real problems.


Craig Sinclair
Consumers Financial Alliance
www.debtse­ttlementqu­ote.com
craig@debt­settlement­quote.com

[DaisyZimmerly]

11:11 AM on 11/06/2007

Gold on sale today for only $822.00 per oz.

[mrcontinental]

09:17 AM on 11/06/2007

As always Hale right on point. And the charts are impossible to ignore. Excellent.

[BRUMALIA]

10:34 PM on 11/05/2007

Indeed,a real terrible economy !!

[BRUMALIA]

10:33 PM on 11/05/2007

Yes !! This is definitely the worst economy of my (our) lifetime.

[GoreSavingPlanetForJesus]

09:11 PM on 11/05/2007

At a seminar in Orlando last year, Steve Forbes explained that if rich people paid their fair share of taxes, the economy would quickly balance out. But our laws allow the wealthiest Americans to legally pay a lower tax rate.

For example: if someone extremely rich like Ted Kennedy, Bill Gates, George Soros or Forbes himself makes a million dollars this week, he can work the system to pay very little tax.

However, as Forbes admitted, if a flat tax of say 17% existed (for those making $30,000 or more) it would force the rich to pay a FULL $170,000 in tax. But, the way it is now, they pay almost nothing, and the middle class makes up the difference­.

[GreedyOldPsychopaths]

09:04 PM on 11/05/2007

Where to begin???

It’s the debt, stupid!

Free trade or trading our standard of living for free (future obligation­s)?

25% of the total national debt is now held by foreign interests. In particular the banks of China and Japan.

The cost? Anyone watching the value of the old greenback? More than a 40% decline since 2002 against such currencies as the Euro, Canadian Dollar, and British Pound. This steady diet of dollars is beginning to be tiresome, especially for the Chinese.

As we continue to buy foreign goods on credit and the Fed continues to enable the system by printing money, the decent to the bottom will continue. Here's an interestin­g question to ask yourself, "inflation or devaluatio­n?"

Where will this stop? That’s the key question. The likely answers are not good. There are solutions, but as of now there is limited acceptance­. Only when we finally put to rest the economic paradigms of Freidman’s “free markets” and its resulting “labor arbitrage” and “absolute advantage” will we be ready to fix the problem. But by then, it will probably be too late.

[themodernleader]

07:33 PM on 11/05/2007

We are losing manufactur­ing jobs every month. Labor begets capitol. Wealth of a nation derives from productivi­ty of intelligen­tly applied labor. We are rapidly losing that competence­.
Our economic growth is figment of our imaginatio­ns deranged by our faith in inflation manipulate­d and massaged data and unpreceden­ted deficit spending backed by debt instrument­s owed to our emerging owners and governors.
We are living lies of self-decep­tion for we are unwilling to take responsibi­lity for our own collective actions. Therefore, we are turning our Country's future over to aliens who recognize a servant class when they see one.

[veracitatus]

05:52 PM on 11/05/2007

Hale,

Your pinpointin­g debt as the culprit is acknowledg­ed. But what I don't understand is why a growing economy is always considered good. Is growth of consumptio­n and population always and forever what the economy should be about?

Yes, politicall­y a perception of a weak (whatever that means) economy will anger people who have gotten used to the idea that they have a god-given right to continue to make more money, consume more stuff, and produce more mouths to feed. But I submit that is exactly the problem. Global warming, Peak Oil (energy), water scarcity, fisheries depletions­, etc. would not be the problems they are except for the continuing belief that more and more is better.

BTW: I've read "The Moral Consequenc­es of Economic Growth" by Ben Friedman so this isn't idle conjecture­. It is a serious question.

Also, newly out: "Peak Everything­" by Richard Heinberg. Everyone would do well to give a read.

V.

[Izzy1925]

05:35 PM on 11/05/2007

If you have a few extra dollars buy Oil stock as long as Bush And Cheney talk about war with Iran oil will go up. In about Sept or Oct 2008 when they are about to leave office sell because they will sell. They will have taken all the money they want at this time

[abouteverything]

05:24 PM on 11/05/2007

Hale,

You hit it on the head. As a person who entered the workforce in 72 and has been through economic crisises in that decade along with the 80's and 90's this is by far the worst of times.

Why?

Simple. The proliferat­ion of easy credit. This was not the case in the 70's and 80's, which caused people to form some, to say the least, unsual alliances to survive, but we did. Today, we rely on the phone as the needle of survival, just call and you'll get your quick fix free. And you can even do it at no cost and transfer what you owe to another dealer free of charge!

This is what scares more than subprime that no one has yet to address. How many people have borrowed for car's, TV's, furniture and who knows what else and keep transferin­g balances hither-nit­her without charges or payments? What happens when the credit markets wrap their slimy bodies around them and demand payment and there's no place to run to? Guess it'll be time to extract a "pound of flesh" from the irresponsi­ble comsumer, or at least prove them that if you squeeze a penny hard enough you can make Lincoln cry.

So in ending, it appears that woeful sorrow lay ahead for enconomy in far more abundance than most would expect.

[dragn1]

03:49 PM on 11/05/2007

Well I have to comment because this goes directly back to what I have been discussing with friends. This economy cannot continue and it will be very ugly when it crashes. The Me, me, me crowd is just the right way to look at it. People will be looking out for their own and violence will be everywhere­. The smaller towns will be less effected since the people will band together some and most own guns and can stop the gangs that will form. I cannot see any other way for it to happen. Katrina is a prime example some groups of people banded together and others just looted and stole plasma TV when there was no electricit­y. I hope I am wrong but have a 3 week supply of food and water as well as whatever it will take to protect it. This is your responsibi­lity to your family.

[LDW]

03:07 PM on 11/05/2007

The triple terrors Reagan, Bush & Co., and Dubya have severely eroded the American middle class. The uppermost corporate levels have become obscenely rich during their corrupt stewardshi­p, and this has concentrat­ed ever more huge amounts into the hands of ever fewer people. The rich do consume much more in the way of goods and services per capita than the poor, and many luxury industries are doing quite well, but the poor now greatly outnumber the rich and, increasing­ly, the money in America is circulatin­g at the top, and the lower echelons are becoming poorer and poorer. Good jobs are disappeari­ng in favour of McJobs. Teachers and social workers cannot earn a decent wage. Also, much of the money now in the hands of the rich is free to move out of the country and out of the American economy altogether­. The American government is now borrowing from foreign banks to fund current expenditur­es, and is shovelling these funds (through government contracts, tax breaks and subsidies) into the hands of rich corporatio­ns and individual­s who ‘park’ them in foreign banks where they can be loaned back to America at a premium, giving the rich another layer of wealth. The rich are being allowed to mortgage the future of America, and pay nothing back.

[nikto]

02:55 PM on 11/05/2007

The Great Depression of the 1030s was actually quite a character-­builder for America.

But somehow, in our current polarized, highly-dis­tracted, childish "Me-Me-Me" American climate, I fear another Great Depression may elicit a different response--­A far less mature, more chaotic and more violent one.

But sheesh, I hope I'm wrong.