Monday, November 16, 2009

I heard a woman today talking about the recession - I was passing by, and wasn't paying all that much attention, admittedly. That said, I think it's a bit disingenuous of a financial planner to be telling any group of souls that the 'recession is ending' when, quite frankly, it isn't.

I'm not a financial guru, but I think a lot of people who are self-proclaimed gurus don't know their heads from holes in the ground. It's just a sort of given; they can't see the state of their industry for being too close to it. I predicted the housing collapse, within a month of when it happened. I locked in the ultimate bottom-fall and called the Bush Administration on the financing of our GDP along with what would come of it in subsequent years. Make no mistake - it's not hard to see how people act, and how their actions will affect the economy... and the outer limits of that economy's resilliance.

The current recession is, brutally and simply, caused by the Bush administration's policy of financing economic growth with debt. Every country does it, now and again - we made a point of doing it.

In real estate.

We made money freely available to dozens of unqualified folks, leveraging equity to build economic "prosperity" in a time when it was obvious that the economy was entering another downward swing. It's a general cycle - what we've learned is that holding the cycle at bay causes the eventual crash to be catastrophic (e.g. Regan and the Tax Cut That Didn't Work), but enduring the cycle ultimately results in a much stronger country on the far side.

Business screams for tax cut right now, and they always scream for a tax cut, and they may even need and deserve a tax cut.. but tax cuts don't fix the economy.


You fix the economy with people buying things.

Now, this seems counterintuitive, doesn't it? Cut taxes, people have more money, they buy more stuff - kudos! Except... during a recession like this one, caused by the financing of the GDP, cutting taxes means that money goes into unproductive work: paying off debt.

Corporations pay down their loans. Individuals pay down their credit lines. The credit industry is tightening at every turn, as it must, and so credit lines paid down are not generally representative of open credit available to be used for purchasing power. Home equity is eaten alive, and those loans really aren't readily available either.

The credit markets are FROZEN. Locked down. Money is going in to clear balance sheets, but isn't coming back out again.

This is the nature of a credit correction. Given that our entire economy is built on credit these days, rather than on earnings, we're correcting into 'what we can afford', not 'what we can borrow to buy' - if you don't have cash, you do without. Like our grandparents.

This recession is currently in a spiral that doesn't show signs of stopping soon. Why?


Debt has eaten us alive - the average american household, according to a recent Forbes, has twenty thousand dollars in debt. They have no means to get more credit in the current economy, of course, and right now people are losing their ability to pay. With the way our system works, all debt HAS to be paid, eventually - the credit crunch is causing dollars that were deferred months or years ago to be paid now.

Until that debt is down to reasonable levels (and banks can lend again) we can't have an expansion in the GDP. There's no way - money we didn't have has been spent.


The more people that end up out of work, the less cash we have to put toward our consumer debt on a national stage. People who are fully leveraged cannot buy anything substantial. Put this up against the markets that have tanked first: housing. Cars. Luxury goods. Entertainment. Now that these markets are failing (relatively), the markets that depend on the luxury markets are going next: insurance, construction, mechanics - blue collar trade. As these guys fail, the retail market falls apart.

Simple dominos, one after another.

This is aided and abetted by the 'race to the bottom' - the deflationary spiral that makes an individual dollar worth more, that comes from the price competition that happens when the consumer dollar's availability shrinks. A little deflation is dangerous, but not bad - heavy deflation will push salaries down, which shrinks the available cash pool.

Why is that bad?

Because the debt remains the same, in raw numbers.

If you owe $20k, and suddenly the dollar is worth twice as much.. you don't suddenly owe $10k. Rather, you owe $20k new dollars - plus an interest rate that was predicated on 4% inflation. Banks, who are stupid, are refusing to renegotiate housing loans in light of falling inflation, and are becoming property owners. Credit card companies at least are being smart - and people are being annoyed with 'em - by shrinking their overall debt load as people pay off cards.

They HAVE to. It's not an option. Soon, the credit pools will be worth more (in purchasing power and real dollars) than they currently are. If they don't limit their exposure, they'll tank on deflation.

So. How can we tell when the recession ends?

The first indicator will be a slight expansion in consumer spending that lasts two quarters. Half a year. That should be a good sign that unemployment is about to turn.

Unemployment has to spend one full quarter (not in aggregate, but each month) trending down at a significant rate. I would say one to two percentage points over a three month period would indicate a spate of renewed hiring and an uptick in corporate sales.

Deflation won't stop if new employees are hired back at budget prices - so the next indicator should be the job value of employees that are going back to work: are they being employed at similar rates to their old positions? (Note that under Bush, we had employment go down a little, but the actual aggregate wage dropped. We got new jobs, but they were worse than the jobs people had before - so, less money in the pool, and more working poor.)

We will slip into a depression if we hit a true deflationary spiral: if cash becomes too valuable. This will happen unavoidably if unemployment goes above 15% - remember, US unemployment numbers do not include those who are not taking (for whatever reason) public assistance. REAL unemployment is usually three to four points higher than our unemployment numbers show. A deflationary spiral is inevetable if any civilization hits 20% unemployment. It's impossible to have anything else - that means one in five people are out of work.

One in five.

Right now, it's one in ten.

I predict that unemployment will turn at 11.5%, give or take half a point either way. If it turns at 12%, our economy will be damaged for decades, all thanks to people who thought you could finance growth without regulation, and who are still in power.

My favorite quote so far - if you want to see how silly people are:

“We believe we could be closer to a peak in the unemployment rate than some analysts expect,” he said. “For starters, it is worth noting that unemployment tends to keep rising until it suddenly reverses and begins moving back down…whenever the unemployment rate turns many market participants may miss it.”
-Joseph LaVorgna, Deutsche Bank
Really? Who'd have thunk? Unemployment rises until it reverses and moves back down? REALLY? Huh. Brilliant.

My advice?

  • Pay off your debt, and do not consider taking on NEW debt.
You cannot finance an economy with debt. Anyone who holds debt in a deflation is setting themselves up for bankruptcy: pay it off with dollars that are good now, rather than the dollars that will be worth more tomorrow. Additionally, if you're downsized or furloughed, NOT having debt puts you in a far better place than if you have debt hanging over your head in the bargain.

If your credit score is already battered, consider offering lump payoffs to your revolving lines. They'll often negotiate for three or four hundred dollars off of balance (sometimes even more) and between what you save and the continued savings in finance charges and interest over the months in which you're paying off, you really win big in terms of raw value.

However. This dings your credit slightly. Be advised.
  • Pay CASH.
If you can't pay cash, you can't afford it. Don't buy it.

  • Get unemployment insurance.
If you cannot pay off your debt, and are uncertain in your job, go ahead and take the unemployment insurance option on your cards. Usually, it's a sucker bet. Right now? That extra $3/mo. may mean you can eat when one of your incomes goes poof.

Be sure to turn that off if things stabilize.

  • Build up a cash reserve.
Make sure you've got actual cash in the bank - from a few hundred to a few thousand dollars. Getting new credit in the current market is a practical impossibility; putting money aside ensures that a disaster in the next few months isn't wholly a disaster.

  • Concentrate on reducing expenses.
Anything you can cut, cut. Get down to the bare, naked minimum and know what that is. Think you can't live without cable? Try. Too many rollover minutes on your phone? Cut your plan.

Make sure you know what your necessities are, and what that budget has to be. The last thing you want is to get to the point where you're doing budget cutting in a panic.

  • TALK.
Talk to your spouse. Talk to your family. Make sure everyone knows where you stand and why. Especially inside your own family: it's very, very important to make sure that financial problems don't become personal ones.

S'what I got. Rambling as it is.

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