06/21/2008 05:12 am ET | Updated May 25, 2011

Caco-Phony and Clarity

It has been a very hard year. House prices and payments are falling. Gas and food prices are rising. There are fewer and fewer help wanted sings and wages have not kept up with inflation. All four support legs of modern middle class families are wobbly. The four legs are wages/salaries, wealth/savings, credit access and cost, prices of basic goods and services. In the best of times wages/salaries are good and rising, costs are low, wealth/savings are growing and credit is available and unneeded. The last year has seen escalating trouble on all fronts.

Wages/salaries and employment have been a problem for years. The 2001-2008 "economic expansion" was defined by the lowest employment and wage growth in any economic recovery since WWII. CBPP data finds job growth -- now negative for five months -- was less than 1% per year on average during 2001-2008. Wage and salary growth barely kept pace with under-reported inflation measures, rising on average less than 2% across the last 7 years. We enter this recession without the employment or wage growth that traditionally act to cushion a fall. One leg of the table is in poor shape.

Wealth and savings over the last 7 years have been divergent. Wealth soared while savings were non-existent. Rising home and stock prices, anemic earnings and easy credit combined to produce Great Depression levels of private savings in American households. The average annual personal savings rate in American from 2001-2006 was 1.55% and fell across the period. In the 9 quarters between 1Q2006 and 1Q2008 the real savings rate from disposable personal income averaged .45%. In other words, no savings were done.

Wealth increases were huge and heavily skewed toward the already affluent. Total assets increased 49% or $23.669 trillion between 1Q2001 and 3Q2007. Wealth peaked in the third quarter of 2007 and has been falling since. In the last 2 quarters, 4Q2007-1Q2008, assets have declined by $1.9 trillion, or 2.6%. Real estate -- at market price -- also peaked in 3Q2007. Between 1Q2001 and peak value in 3Q2007, real estate prices increased $8.873 trillion, or 65%. Since 3Q2007 real estate has declined in value by $426billion, or 1.9%. We are now running in reverse with plenty further to go. Much of the loss in wealth will be invisibly removed by increasing inflation. The rest of the loss will come as asset price decline. You may be tempted to see all this as just a slight correction of inflated asset prices. I would strongly suggest the asset bubble -- already deflating -- needs to be judged against the debt bubble that fueled it.

All those much celebrated paper wealth gains were fueled by a borrowing binge of truly epic proportion. 1Q2001-1Q2008 household liabilities increased $6.5trillion, or 80%. Mortgage debt increased by 99%, surging by $5.3trillion to $10.6 trillion. Indebtedness has continued to rise even as the houses purchased steadily fall in value. What we owe is growing, what we bought is losing value. This is the fuel of the unfolding tragedy in many households, neighborhoods and states. Earnings were flat, employment growth was negligible and borrowing soared. More debts and no more way to pay those debts created the need for endless borrowing against endlessly rising house prices. When that ended, 3Q2007, the gig was up. This leg of the table is burning! In the end, it really was just the bubble supporting the bubble. It will be a long fall to earth. It will be harder and harder for American families to borrow less money.

Falling employment, stagnant wages, rising debt, no savings and constricted access to credit are plenty to worry about. I wish I could end there. Rising costs are the final piece of the squeeze puzzle. Energy and food prices have joined medical costs, tuitions and housing on the out of America's reach list. The newest price numbers we have are from the Bureau of Labor Statistics release on May 2008 prices. Here we learn that since May 2007 fuel oil and other fuel prices rose 50.7%, food prices rose 5.1%, dairy prices rose 11.0%, utility prices rose 11%, education costs rose 5.7%, hospital and related services rose 7.5%. All of these increases are greater than the increase in household income and most of them are massaged down through season adjustments and other gimmicks.

Through the cacophony of reassurance and gyrating reports, America's true economic tone is very sad. The bells are tolling for millions caught off guard by stagnant wages and job growth, falling savings, rising debt, shrinking wealth and spiking prices. Turnaround is possible and has been successfully done before. It will require far more than a new conductor leading the same economic orchestra.