I do not know if we are headed towards a depression but I cannot dismiss the possibility. I do not claim to be a prophet. Indeed since the old Jewish saying says that since the time of the second temple the gift of prophecy was taken from the wise and given to fools, I prefer to not classify myself among fools. So I am going to speak of probabilities rather than certainties. Never-the-less things look grim. The Banks - American Banks - are widely reported to be holding a trillion dollars worth of bad paper, and it could get much worse. If the banks wrote down all of these bad assets, they would have to admit that they are bankrupt.
Unemployment is rising
Consumer spending is falling
There is at least a trillion dollars of excess capacity in the American economy.
The Gross domestic product is down but would be much worse if businesses were not lying in inventory.
The savings rate is up, while housing prices are down, more and more home owners are underwater.
Finally the debt to income ratio is bad.
People are losing jobs at a steady pace. As people lose their ability to pay, more and more Americans are tempted to walk away from their mortgages. As people lose their jobs, more and more will be unable to pay credit card debts.
More and more big name American corporations are virtually bankrupt. More and more business are going under.
Over 40% of stock market values have been wiped out. American investors have lost over two trillion dollars and there is reason to worry about more losses. What do you think?
Will the stimulus package work?
What will be the consequences of the financial situation for the future of American energy?
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8 comments:
charlesB,
First, I think you have said "billion" in a few places where you mean "trillion".
The American consumer has been borrowing to fund a standard of living beyond their income. This borrowing was supported by the housing bubble. The housing bubble has now burst and house prices will now fall back to the historical relationship with incomes. (similar to the stock market bubble falling back to traditional PE ratios)
The gov is trying to borrow to replace consumer borrowing. First they are not borrowing nearly enough (>10trillion lost in house and stock market evaluations in the US alone)and second, if they did borrow enough we would only prolong the inevitable reckoning.
I am afraid we will have a very deep and long recesion.
Time to pay the bills. The party is over.
charlesH
Charles the problem goes much deeper than exporting jobs. There is the crazy business of expoerting jobs ands manufacturing to China, as an inflation fighting measure. That, more than anything else, is the cause of the crisis. All of those things we havebeen buying for thelast few years, ere manufactured in China, and paid for with money we borrowed from the chinese. The Chinese were propping up the Dollar. Well we did not have inflation, but we seem caught in a deflationary death spiral.
Deflation yes but from inflated levels (housing, stocks). These need to reset to traditional ratios. Houses 2-3x household income, stock PE 10-15.
If we go way below these ratios then we have real deflation. What we have now is dis - inflation, which is a good thing.
China, yes they have been lending us the money to buy their stuff. From now they will have stimulate internal demand if they want to grow like they have. The US consumer is over his head in debt and the US government may get there soon, if not already there.
charlesH
When I first started working for a Japanese company the yen/ $ ratio was 400-1. Now it is under 100-1.
The same thing will happen to China. When we as individuals borrow beyond our ability to pay we declare bankruptcy and lenders get back less than they borrowed.
When a country borrows more than it can repay the currency eventually devalues and the lender again get less than they lent in the first place.
In both cases the borrower is forced to live within there means - less stuff for the US going forward.
charlesH
The US needs to start creating wealth instead continuing to create the illusion of wealth.
An economy largely based on housing speculation, credit cards, federal deficit spending, creating cheap products by exporting high wage jobs overseas, an inherently inflationary public and private health insurance system, a continuously growing dependence of foreign oil and endless military spending was bound to collapse the American economy.
Marcel F. Williams
http://newpapyrusmagazine.blogspot.com/
I agree completely. The Post-Modern economy has collapsed. I foresaw the problem over a decade ago. An economy that gives up on making things is an economy that is headed for poverty.
What is your opinion of the Kondratieff Cycle? IMO, there may be something to it. If the 54-60 year cycle is based on generation aspects, then it would naturally be 'stretched' beyond 60 years. Since these cycles of wars and economic birth and renewal occur every 2-3rd generation, we can say that when the generation to last see a depression dies off, it's time for another cycle to begin. Our great credit bubble of the last 60 years is being washed away at the very trough predicted by the Kondratieff wave.
Axil
One view of the Kondratieff Cycle is that it is driven by the regular opening up of new transport methods. That would mean it makes sense to keep an eye open for new developments like that. Who knows, maybe nuclear powered flying cars are just around the corner! (That was a joke, people - I'd much rather have a Tardis with its controls working.)
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