We were all drunk with spending. The housing asset bubble delayed the collapse in Aggregate Demand from the tech boom bubble.
Consumer Demand will never be as high as it was before with the world bankrolling American spending with financial derivatives and creating invisible money with credit default swaps.
Its time to tighten the belt and hold in for a bumpy ride.
In the 1990s, most conservative/free market economists thought that Bill Clinton's tax hikes would harm the U.S. economy---nothing like this, but there was a consensus. Well, the plunging oil prices and the phenomenal productivity gains of computers offset those hikes by several orders of magnitude.
The impact of lower energy prices, spread throughout the economy has still not been factored in by all those obsessed with housing numbers. Cheap energy covers a multitude of sins.
Last---who knows how long it will last---but just this week existing home sales rose 65%.
What made the 1930s different was that a) government got involved in the economy to a degree not even minutely touched here. Smoot-Hawley, for example, constituted a hit of 5% of GNP on the economy---not to mention Hoover's taxes, FDR's taxes, the minimum wage increases, foreign tariffs shutting off exports, and so on.
Now, I don't put it past Obama to utterly screw this up: if he pulls out of NAFTA, throws on protectionist tariffs, hikes taxes, and starts heaping on the regulation, we could still get there.
It’s always darkest just before it goes completely black.
Interesting article/thread. Thanks to all posters.
Either trying to grow the economy out of its problem, or using inflation to reduce debt, the only two techniques of the “easy credit” economy since WWII, will not work any more. In fact, they will make the problem worse.
The saying used to be, that “You can only have credit if you don’t need it.” And that truism is now going to return with a vengeance.
Individuals, corporations, the US government and international governments all violated this rule since WWII. Credit should *only* be for those with more than 100% “reliable” collateral. This means that ALL other debts will have to be eliminated before we will be able to return to a stable economy.
The last gasp of this postwar system is happening with the evacuation of liquidity to USG T-Bills. And even with yields approaching zero, all this does is permit the last big splurges of deficit spending. Already the long term T-Bill is at risk of default, the government being close to unable to pay its yield. With one more step, in which the government cannot return the principal, the game is over.
Next year, tax revenues will be down by double digits. By then, the Treasury will no longer have anyone willing to offer it credit, because it cannot guarantee that the capital will be safe. From that point, the US government cannot deficit spend a dime. Large parts of government expenditures must be halted, to provide money for critical parts of the government.
But a balanced budget will not be enough. To do anything positive, spending will have to be slashed even further, to provide hundreds of billions of dollars to get the economy moving again.
Oddly enough, the international credit collapse provides the USG with an opportunity to erase much of its foreign national debt. We can exchange food to those countries dependent on us, in exchange for dept relief.
Large numbers of investment corporations and banks will fail, and there is a severe risk they will try and take down essential national corporations with them. For this reason, the USG should print and have ready guaranteed high denomination paper currency, solely for use by critical industries, and then only with the permission of the government. That is, a guarantee that they cannot go bankrupt.
In denominations from $100k to $10M, this gives critical corporations the ability to continue essential commerce with each other, but insulates them from insolvent leverage corporations who are not permitted to own that currency.
Such a critical corporation could not buy or sell those bills without permission, so could only lose its “normal” money. The rest of its money would be free and clear to use as it saw fit. But the core money could not be touched, protecting them from bankruptcy.
Such money would also be 100% collateral for loans, and companies would be very willing to loan money to get their hands on these bills, because it would be their life insurance as well.
Finally, these high denomination bills would also be exchanged for lower denomination bills that are always in shortage in the economy, and would help keep retail business going as well.
The big four parts of government are Social Security, Medicare, Medicaid, and Defense. Only a small amount of cutbacks can come from discretionary spending. The rest must come from these four.
Futures markets getting crushed. Stock markets are acting like they did in 1929 with massive swings. Nobody has any clue how to price the market so one day the bulls pump it to the moon and the next day or two it crashes. Anybody in the market right now has a hole in their head, or is oblivious to the insane risk to every company out there. When recession-resistant consumer staples like McDonalds are getting caught in the cross-fire, it is time to get out, unless you have both a brass set and deep wads of money to lose.
You are not investing this market. You are gambling. Go to Las Vegas and take in a show. You won’t win any more there than in this secular bear but at least you will have got a show and some drinks for your money instead of just the shaft.
To anyone in the market right now. Good luck. I think you are flipping nuts.
Deleveraging is a bitch.
Market collapse in 10... 9... 8...
Treasury collapse in 7... 6... 5...
Dollar collapse in 4... 3... 2... 1...
BLASTOFF. Houston, we have meltdown!