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James Boyce

James Boyce

Posted: August 4, 2009 10:32 AM

Welcome to the Reality Recovery


Last fall, I wrote a piece for the Huffington Post called "The Darwin Depression" which focused on how the end of cheap capital was going to force many many businesses in long-term losing legacy industries to shut down. Essentially, this is what has happened in Detroit and with the end of the line for so many newspapers, and other brands and companies that were surviving not on profits and growth, but on cheap credit.

Cheap credit supported not only their companies, and in some cases, decades of poor decisions and bad management, but also cheap credit that supported their customers, who as the asset bubble grew and grew, cashed out of the asset bubble and used the money to fuel purchases and lifestyle. All the while we are borrowing $2 billion a day from China to "maintain our lifestyle."

When the economic earthquake hit last fall and into the winter, there were literally days that business owners felt like there was no bottom to the downswirl. This is what happened when at a large, macro level, the world made a hard adjustment to the new reality.

However, as the bubbles around us have popped and popped and as people, even some whom I would think would know better, start talking about "green shoots" and recovery, it's important to realize what was true about our collective lives over the past ten years, longer really, and the reality of our current economic situation.

For a generation, we have been living far far beyond our means, and at one point a few years ago, we, as a country, had a negative savings rate. Our Federal Government's debt is simply astronomical and out of control. Soon, perhaps next year, for the first time in history, the Federal Debt will reach our total GDP, one of those facts that seems benign until we realize the true implications.

Of course, it's not just the Federal Government that is in debt far beyond its means to recover. American businesses have been soaking in cheap credit and debt payments are choking those companies. If you look at the shocking debt that companies such as the New York Times accumulated, it's a miracle they are still in business.

What's worse, of course, is that much of that money that was moving onto corporate balance sheets was actually not used to grow or improve the businesses, but to inflate the salaries of those within the companies. Sure, it's criminal at worst, immoral at best, but it's reality.

Beyond the government and corporate debt, we come to the debt of the average American. Our use of credit to again "maintain our lifestyle" has created a lifestyle that can not be sustained.

Here the statistics are shocking enough, but it is the anecdotes that make the point even clearer.

A generation ago, what now looks like frugality, a family of four sharing a car, neighbors chipping in and buying a seldom-used piece of lawn equipment together, driving to a summer vacation, that wasn't frugality, that was reality.

The reality of living and working is not reflected in a middle class family of four having three cars, and a Jet Ski and going to Florida twice in the weekend, or Mexico, or Europe.

Reality is driving cars until they have 150,000 miles and then giving that car to a child turning 16.

Reality is saving up and putting 20% down on a house. Let's pause here a moment. How many people do you know you actually have 20%, in cash, in the bank, to put down on a house in your neighborhood?

It's not just the housing market that popped, it was a bubble that enveloped our entire country. A bubble where mediocre baseball players get $5 million a year. A bubble where ten year old kids have $200 phones. A bubble where blue collar workers were buying condos in Florida.

It was a bubble of restaurants charging $20 for appetizers and golf balls costing $75 for a dozen. It was a bubble that started in many places, grew larger and larger, eventually it popped.

Popped is a word that seemingly eludes the economists who are predicting recovery. When bubbles pop, there is no recovery, there is only new reality. Ten years after the Tech Bubble popped, the NASDAQ remains well below half of what it was at its height. And just as shares of lightbulbs.com will never hit $50 again, so will our lives never return to the life of the bubble.

This is not the opinion of a pessimist; it's the observation of a realist.

This is not the bottom of the trough.

The is reality.

We have recovered by landing here. It's back to normal. It just feels like a depression.

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