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December 28, 2008 –
No, that wasn't it.
The economic rumblings we've been having, people are
asking, "Was that the worst?" "When will the recovery begin?"
If you recall, they were asking the same questions back in January
when the first wave of mortgage write-offs happened. Merrill
Lynch (since bought out,) Citi, and others had massive write-downs.
The news said, well, that was it. Maybe a few months 'til the
recovery. Six max.
Of course, M/I called that nonsense nonsense.
And, as you've seen, it's only gotten far, far worse since then.
So now, after the disastrous string of bankruptcies
or near-bankruptcies in late summer, all of America's large
automakers on the verge of bankruptcy, and retail sales in the
toilet, people are asking, "How long will this last?"
Unfortunately, that is not the right question.
"How long will this last?" assumes we are at the low point. We
are nowhere close. In fact, the real collapse hasn't even
really begun yet.
But it is about to.
When people talk about the worst crisis since the
Great Depression - and in reality, a worse one - they notice a
disconnect between the average person's reality and what they know
about the Great Depression. Things aren't that bad. They
haven't actually changed that much at all.
That is about to change.
Virtually every employer is in a combination of
hiring freeze/layoff planning. There are things no one is
talking about, like investment income and endowments, that most
major businesses depend on, as well as hospitals, universities, etc.
Virtually every company has lost between 20-40 percent of their
base/endowment, never mind the positive growth revenue they depend
on. This requires a massive cutting of expenses, i.e. layoffs,
hiring freezes, etc. And it is very important to note that
this comes before diminished sales are even considered. Had
sales stayed steady, the loss of this investment revenue would still
require massive cuts.
But sales haven't stayed steady. In fact, they
are collapsing across the board. People are not understanding
what is happening. It goes back to the article I wrote some
months back,
It's Not Just the ARM's - Deflation Across the Board is Due.
The entire economy is a bubble.
Let's make sure we are finally getting
that. The entire economy is a bubble. It is not just
mortgages.
But speaking of mortgages, remember the
ARM thing mentioned in the above article. Well, you are
finally hearing about those in the non-M/I media. Nice, only
three years behind M/I this time. What the news is is that the
mortgage problems we have seen so far, they were not the worst of
it. Those were just subprimes, dumb loans that might be
reworkable. With ARM loans, their "balloon payments" triple
overnight. Yes, triple, or more. Overnight. And
they are about to, en masse, reset to these higher payments.
There will be no reworking these loans. And there are years
more worth of them left in the system.
So, back to everything being a bubble.
We have these mortgage issues - which are just about to get a whole
lot worse. And then, there is, well, everything else.
For a generation Americans have not been able to afford what they've
been buying. The price of everything is higher than can be
afforded. The quantity of everything people have been buying
is not sustainable.
To understand the scope of what I am
talking about, let's go back to 1970. Back in 1970, most US
households were single-earner households. Yes, one person
worked, and was able to buy a house, a car, etc. They didn't
do it on credit cards, since credit cards as we currently use them
didn't exist. Even when people bought cars, they did things
like pay for them. Or at least pay for a major portion of
them. They didn't, as we have been doing for some years now,
just take a car for zero down at a payment they can barely make that
will last five years.
The reality is, now we have both members
of the household working, and we are able to afford less than we
were back then with only one person working. This is the
problem underlying our current economic demise. And to fix the
situation, it is not simply a matter of bailing out car companies,
flooding financial companies with cash, or giving American
households a little stimulus money. To get out of this mess,
we need to fundamentally rework an American society that hasn't been
working for a generation. Credit has kept this unsustainable
situation afloat for some years. We are now all credited out,
and so the situation cannot be avoided any longer.
What needs to happen specifically is
that we need average person wages to jump massively while top-level
wages plummet to offset this. If you think that is going to
happen quickly or easily your are in fantasy land. We also
need to get out of free trade agreements. We will need to see
things like college tuitions, which have only been supported by an
absurd bubble on loan-taking, plummet. Yes, plummet. And
with endowments plummeting while tuitions plummet while donations,
which are required en masse by most colleges and universities just
to operate, plummet as well, it will, needless to say, get ugly for
our higher learning institutions.
And just take that example and roll it
out across the board. Be it hospitals - also dependent on
revenue, endowments, and donations, or just average businesses,
which will have to slash their prices across the board, it will get
ugly.
Now don't forget your part - yes, your
part. You were warned. Shop at Wal-Mart, and you put
every mom-and-pop on Main Street out of business. Rather than
people having businesses, they fight for part-time, low-wage clerk
jobs, while all the profits that used to be their income now go to a
single company, such as Wal-Mart, which then hands it all to a few
people and spends a ton on advertising.
And let's play out the advertising part.
You see Citi going broke, Chevy, and Wal-Mart spending billions on
ads instead of salaries. Well, all those baseball player and
movie star salaries we've been excited about; yes, that was your
paycheck. It could not have been more stark a few days back
when the New York Yankees, in the middle of this crisis, just signed
someone to play first base for, yes, more than $22 million a year
for eight guaranteed years.
Now think about that. Where does
that money come from? Not from ticket sales, they couldn't
sustain it. It was Citi. It was Chevy. Naming
things and advertising. It is Wal-Mart advertising on TV that
lets those stars make their millions.
All of the big celebrity and sports star
salaries you have seen fly through the roof over the past few
decades have come directly from you. That loan you took from
Citigroup that you can't pay back now, that interest was going to
pay some man $22 million to hit a ball. For historical
perspective, it was Dave Winfield, back around 1980, who was the
first ever baseball player to make $1 million a year. Since
1980, baseball player salaries have jumped more than 22 times what
they were. Have your wages increased 2,200% since 1980?
If they had, the $50,000 you were making back then would now be
$1,100,000.
No. In fact, not only hasn't your
salary increased that much, but, rather, yours has
in effect declined. The two incomes of your household can't afford what
one used to. All of the nation's money has been sucked up into
the hands of a very few. This is what needs to be fixed for
the nation to get back on track. Bailing out Citi so they can
keep their $400 million contract to name the Mets' stadium, baling
out Chevy so they can keep handing billions to the NFL and MLB to
pay ridiculous salaries - these do not help the situation, but
prolong the problem.
And so. I don't want to be the
bringer of bad news. But I've been warning for half-a-decade.
The downward spiral we are about to see over the next six month to a
year will be unlike anything the nation has ever experienced.
Where the bottom will be remains to be seen. And no, that
doesn't mean there may be some soft landing. What we are
waiting to see is whether it will just be a horrible, painful
depression, or truly all-out economic collapse like has occurred in
places like Argentina and the former Soviet Union.
The continued flooding of our failing
companies - companies that need to be allowed to fail since they are
not sustainable - with money we don't really have seriously brings
forward the risk of our currency collapsing. $100 loaves of
bread. This is what happens in countries that go the way we
are about to go.
We've heard the lie from Chairman
Bernanke that companies like Citigroup and AIG are too big to have
fail. That is not the case. In fact, they are too big to
succeed or survive. Since the 1980's, the unfettered allowance
of merger after merger has given birth to these mega-multi-nationals
which, quite simply, are abysmally corrupt and unsustainable.
They are too big to function usefully. They are great at
handing $400 million to baseball teams for naming ops, but not
competent at their core business. They require too much
revenue per average person. When Americans were on the upswing
side of the borrowing curve, this worked. Now that Americans
are returning to spending sanity - if only by necessity - these
companies cannot possibly generate enough revenue, sell enough
loans, make enough money from credit cards, to survive.
And unfortunately, so far the federal
government has been doing the exact opposite of what needs to be
done. Every business that is unsustainable needs to be allowed
to crash. Every homeowner who is in a house they can't afford
needs to be tossed. In short, the market needs to make a
massive correction, and it is going to one way or another.
Throwing in effect trillions of dollars, when interest on the
hundreds of billions spent so far and about to be spent is figured
in, to prolong a needed demise will not only prolong the inevitable,
but leave the nation that much closer to death due to the
exponentially greater debt and interest payment load.
The layoffs we are about to see, the
cutbacks, the hospital closures, the homelessness... Ladies
and gentlemen, God Bless America.
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