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November 24, 2008
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If it's new to the national conversation, that means you must have
read about it at M/I some months or years before. And this is
the case with the latest buzzword that has all mainstream economic
reporters in shock: deflation.
Remember back in January - you know, when for
even Barack Obama and Hillary Clinton the economy wasn't the central
issue; when phrases like "economic crisis" had yet to be used; when
"subprime mortgage" had yet to become a phrase Americans were
familiar with, and which, back then, people were mistakenly
beginning to think mortgage defaults were the problem facing the nation.
Back then, almost a year ago now, I wrote this
article:
It's Not Just the ARM's - Deflation Across the Board is Due.
At that time, the nation was seeing the first of a round of
write-offs by firms like Bear Stearns (which still existed, with no
suspecting it's existence to be in danger), Merrill Lynch (since
bought out), and Citigroup (now being bailed out.)
The rest of the planet debated would
this "little economic bump" right itself after this round of
write-offs; would it be done in 2 months, maybe six the most?
But, as I wrote back then:
...the reality is, with gas prices
through the roof, loans readjusting buy the hundreds of
billions year after year, credit card debt insurmountable,
interest rates bound to climb, and the national government
having to pay back the massive debt it owes to foreign banks
with a massively weakened dollar, America will be lucky just
to have a horrible recession rather than an all out depression
or financial collapse.
Yes, it sounds extreme, but so did
this meltdown when we talked about it years ago.
Unfortunately, it was just reality.
And add to this that housing
prices are not the only ones that are artificially high.
Since the late 1990's, Americans have been setting a new
record for personal bankruptcies every year. And the prices
of products and number of things they have been purchasing
have been artificially inflated, just as in the housing
market, by easy availability of credit card credit and similar
teaser rates to those in the housing market.
And so housing prices are not the
only ones over-inflated beyond what the American market can
actually support. So as the credit crunch tightens with the
housing meltdown, the nation will have to see a general
deflation and substantial retraction across the board. It's
been a couple decades of unsustainable excess unlike our
nation has ever seen. Remember, credit cards as they are only
came on the scene during the 1970's, and only spread as openly
and freely, even to college students without jobs, during the
late eighties on into the nineties. This is a new problem...
The piper played, Americans
followed, and now he wants his due. Just think of the
situation as with the obesity epidemic - we have eaten so much
we are so swollen and fat we simply can't consume anymore.
Unfortunately, as liposuction and gastric bypass are the
treatments people are having to undergo to adjust to the
problem, and still the fallout in diabetes cases and other
serious problems aren't being avoided, the economy will have
to have liposuction and economic bypass. And what this means
is deflation and a serious reduction in consumer consumption,
ie spending.
Recession, without question. But
don't underestimate the possibility of an all-out economic
collapse.
This past week, the rest of the world
started to catch up to what I wrote back then:
From TIME Magazine online:
The Global Economy's Big Fear Becomes Real: Deflation
From the Washington Post:
The Shadow of Deflation
How about a little deflation video from AP:
Video: Consumer Prices Drop Record 1 Percent in October.
Yes, not just deflation, record setting deflation.
From the New York Time:
Prices in Canada Decline, Raising Fears of Deflation
Only about a year behind M/I this time; on the coming
of this meltdown they were a good half-decade behind.
So what is actually happening, and what can be done
to deal with it?
Well, let me start by saying it is amusing - or would
be if it weren't such a serious situation - to hear Benanke, the
Fed, and the world leaders talk about what they see as the problem
and the solution: frozen credit markets, with "unfreezing"
them being their proposed goal, the $700 billion bailout fund
existing to help accomplish this.
Um, here's a hint: credit is not frozen, it's
dead. A dead product that is.
As I wrote back in January, credit was the boom
product of the late '80's, throughout the '90's, and into the early
millennium. Credit cards didn't exist as they do back in the
1970's. By the late eighties students without jobs were being
given them. By the nineties, using them became the norm, at
grocery stores (which didn't used to accept them), to buy gas, and
don't forget all that online charging. People used to actually
buy cars, not just take out 5-year loans they can barely afford for
them. And then, of course, there was the mortgage mess.
Well, now Americans are spent out. To continue
with my favorite metaphor for what is happening: people used
to eat 1 cake a month in the 1970's. In the 1980's, they
started eating cakes bi-weekly. By the late '80's, a cake a
week. In the nineties, it went out of control, and people were
eating cake daily, two, three, five cakes a day. And as the
new millennium began, cake eating surged to an average of 100 cakes
a day per household, 1,000 cakes a day. Finally, people are all
eaten out; the diabetes, heart disease, etc. have hit them, and so
they realize they need to stop eating cake altogether. Not
only do they cut back their cake-buying massively, but with the
average American household having on average more than 10,000 cakes
stocked up in the cupboard (the average American credit card
debt-load in dollars), cake sales collapse.
Now, Bernanke, Bush, etc. see this, see their friends
in the cake-baking industry start going out of business, and they
start sending massive barrels of flour and sugar. The first
round doesn't help, so they amp up, 700 billion barrels of flower
and sugar.
See the problem? The problem isn't a lack of
flower - or, in the economy's case, a lack of available credit.
The problem is that cake is a dead product; people are all eaten
out. And that is the case with credit. People binged
beyond anything sustainable. Credit was a new product as it
existed throughout the past few decades, and like with other
products that come into and fall out of fashion, so is the case for
credit. Its day is done.
The idea that the credit markets are just frozen and
by pumping them with cash you can just unfreeze them and have things
go back to the way they were is not grounded in sanity or reality.
It's like expecting people who are dying of heart disease and
diabetes to go back to eating 1,000 cakes a day. It never will
happen. That $700 billion, as I wrote when the bailout
occurred, was a disastrous misplacing of emergency resources (and
resources that don't actually exist, since it's borrowed money.)
Little by little the rest of the world is starting to
get what I've been writing about for more than half-a-decade.
No, not a little downturn. Not, not a small recession.
This is an economic catastrophe unlike anything our nation has ever
seen.
And for those of you - and it is still the majority - who are
wondering if this is it, is this as bad as it gets, is this the
throes of depression or collapse... sorry. This is just the
tip of the iceberg.
It is good at this point to stop, get a little
distance from the distracting, off-the-mark storyline regarding the
economy out there in the national and international conversation,
and look back to an article I wrote on July 7, 2004 talking about
this disaster coming. The people who are talking now were all
caught by surprise, so obviously you can't count on what they say
now to mean anything more than you could count on their talk about
"recovery" back in 2004 to mean anything. I'm not going to
excerpt from the article - you should go back and read the whole
thing:
Economy - Does Anyone Remember Something Called The Deficit?
It is one of the few articles in existence that usefully talks about
the actual economic situation we are facing and its true root
causes.
The problem facing America is not subprime mortgages
or a frozen credit market. I didn't write the article telling
of this coming economic situation talking about frozen credit
markets that would be in need of freeing up. Credit is dead.
Deflation on a massive scale is due. We are just at the
leading edge of this spiral down, not even remotely in the throes
yet.
The good news is that America is finally freed of the
conservative economic tyranny that brought it here. Obama is
looking like he might have a plan that is on the mark. We will
see. Although I do have to say that a key piece of his
proposed solution, which I wrote this article about a month or so
back -
BARACK'S BRILLIANT PLAN: Obama's Economic Rescue Package So On
The Mark It Would Be A True Game Changer, In A Good Way -
his plan to allow people to tap their 401Ks without penalty, was the
best short term solution I've heard, but no more has been heard
about it since the day he rolled it out right before the final
debate, so we can't be sure if it is lost or will actually be
implemented. Before the holidays would be the right time to do
it if it is to help short term, but it doesn't seem likely.
Also, the unspoken negative story of the past
half-decade - oil prices, ignored until the past few months - are
now the unspoken positive, which will allow some breathing room.
Two positive steps for America's longer term outlook.
But for the immediate future, let the downward
plummet not just continue, but pick up pace.
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