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Dec 1-5, 2008
- Well, it’s official. the National Bureau of Economic Research has finally admitted that we are in recession. In fact, they announced today that the recession began…a year ago in December 2007!!! Nothing having your finger on the pulse of the economy, eh? This august body also says the average recession tends to last about a year, but this one, after a year in the making, is apparently just gathering steam. The big question on everyone’s mind now is whether it will continue to fall into a depression, which would be any period where the GDP contracts by at least 10%. The stock market took the belated news badly on Monday, falling 679 points, the fourth largest drop in its history and a loss of 7.7% of its value in one session. How any of them could have failed to notice that we’ve been in recession all these months is beyond me. It’s like not noticing your in-laws have been living next door the last year. They should read more blogs. They might learn something.
Credit Crunch
No, it’s not a new cereal with Ben Bernanke’s picture on the box. It’s been the headline in virtually every financial publication for the last year, but
now it’s about to move off the pages of newspapers and web site stories and right into your home. With losses mounting, the nation’s biggest banks and credit card issuers are still battling to stay solvent by
reducing risk, limiting lending and tightening credit. The business that has been one of their big cash cows in the past is going to get hit with a severe downturn—consumer credit cards. That little foray out into
the shopping centers on Black Friday, was largely paid for by credit cards. In fact over 95% of all purchases were made on credit. It’s the only way many people can afford anything out of the ordinary, and Christmas is a
time when people are put under the tremendous psychological stress of obligatory gift giving. In the last ten weeks they’ve charged over $32 billion in new credit card purchases, more than the total of the previous ten
months. That works out to around $450 million per day in credit purchases, all new consumer credit cards loans extended by banks. Analysts have noted that changing patterns in how the cards are being used are also strong
indicators of consumer distress. People are charging for gas, for fast food, even taking advances to pay basic bills and tardy mortgage or rent payments.
The news that the major banks are about to remove $2 trillion in
existing credit lines from their books is going to squeeze the last air out of the tires presently keeping the “real economy” rolling. By all accounts economic activity is actually at a near standstill, but further
credit restriction will be the death knell for most consumers. They will receive one of those polite letters, or perhaps just a computer printed message in their next bill that says their credit lines are being reduced. If, for
example, you have a card with a $5000 line of credit, and you’ve charged about $1500 on it, you may suddenly find that the bank has lowered the credit line to something like $2000 or even $1800, just a bit above your
current balance. I’d call this ‘decapitation’ but the word is not strong enough. That would only mean a 10% credit constriction. Let’s just say that consumer credit lines are about to be devastated to
the tune of 40% to even 50% of their current limits. Add this to the dismal employment picture and you’ll see where this is heading.
The U-6 adjusted unemployment rate tracking people who are now either unemployed,
marginally employed or only able to find part time work, reached 12.5% by November 30, 2008. Nearly two million have lost jobs in the last year. While the ‘official’ unemployment rate is currently 6.7%, it’s
that adjusted number of 12.5% that tells the real story on the street. Again, when the official number hits 10%, we’re talking Depression. Since we officially moved from 4.4% to 6.7% in 2008, that “official”
unemployment increase of 2.3% this year was a 33$% increase in the rate! If we do the same in 2009 and add that to the current figure we hit 9% unemployment by the end of 2009. This would make the adjusted U-6 number about
17% by the end of 2009. But I predict that number will be even higher because we only saw the leading edge of unemployment in 2008. In fact, the popular site shadowstats.com believes the government numbers are unduly rosy, and
asserts we are already at 16% real unemployment. No matter how you slice or dice the numbers, this is a recipe for real hardship—a slide from relative affluence into poverty that can happen in a matter of months or weeks
for average middle class people who lose employment income in this environment. People without jobs don’t buy things, they don’t pay their bills, and they don’t put money in the bank.
Since Americans
have been spending 125% of their annual income each year, with the overage on credit, this means we are looking at consumer spending to fall by at least that much or more in the long run. As this spending represents 70% of the
real economy, it easily results in a general economic downturn in GDP of 10% or more—which is again the definition of a depression style economic slowdown. Forget the R word no one was willing to say on TV for the last
year, even though the recession “officially” began December of 2007. Now it’s the ‘D” word, a bona fide Depression with a capital D, all courtesy of your friendly banker.
I have long argued
that the entire ‘financial crisis’ that has been ripping the economy apart is entirely self created by the banks. They set up the boiler rooms in hundreds of subsidy loan sharking companies that have since gone
bust. They wrote the loans, shoveled out the credit, then sold them off in bonds and securities, and took out lots of insurance against default. They leveraged themselves 40 to 1 in this bogus paper, knowing that, at that
ratio, it only takes a small percentage of the loan base to default before their capital gets wiped out completely. They thought they were protected by companies like Fannie, Freddie, AIG and others, but we have seen the
fallacy of that. So they went to Uncle Sam and the Fed, the lenders of last resort, for free money. Now they are being forced to drastically curtail one of their most lucrative and profitable business lines, consumer credit
cards. At every step in the chain above, the customers they serve, the folks who deposit their hard earned money with them, were treated as nothing more than a means to ever increasing profit. And when that didn’t work
out, those same customers, and now their children, will be the taxpayers providing the bailout. Nice work, eh?
Another likely backlash of this latest bank inspired malady involving credit tightening will be a debt revolt
at the consumer level. The old game of tease and squeeze by the banks is over. Just read user comments in blog after blog as they respond to articles on the crisis and you will see the mindset that is rapidly forming. People
will set their priorities in this order: first food, then rent, then utilities, then car, and last on the list of bills to be paid will be the credit cards. That was not the case while those generous open credit lines sat
waiting to be used. People think of an open credit line as if it were actual money in the bank. Once these lines get shut down, the last incentive to making timely payments on cards already burdened with 30% interest rates will
quickly evaporate. Card holders will default on those payments without a second thought, and there is little the banks can do about it. Desperate people do desperate things. They can even be heartless enough to trample a man to
death in a Wal-Mart store just to be first to the bargain bin on Black Friday. What does this tell you about how they will act when the opium of credit is suddenly not available to them any longer? When they don’t have
the cash to pay for the Big Mac they charge on credit today?
All the traditional disincentives to default will go by the wayside. People won’t worry about their credit ratings, as they will soon be irrelevant
anyway. Since a huge chunk of your FICO score is the ratio between your total credit lines and the amount you’ve charged, when the banks slash down the line from $5000 to $2000 your FICO score suddenly takes a major hit
as well. People who were at, or slightly above, the ‘prime’ line, (about 685 in FICO terms), will suddenly become ‘sub-prime.’ In fact, I would not be surprised to see 60% of the nation is soon to be
sub-prime, with another 20% just skirting the edge and slated to fall in due course. So who’s going to drive the economy, the remaining 20% at the very top? Just how many cars can they buy to keep Ford, GM & Chrysler
afloat? No on else will be able to get financing, which is why the bailout plan for the big three is doomed to fail. The auto makers can retool and crank out a miracle car that gets 50MPG in nine months, but if nobody can
get financing to buy it, they will sit on the lots along with all the other unsold cars. So if you want to know why the big three will fail, just ask the banks again. They won’t lend to anyone but Suzi Orman now, and Suzi
already has all the cars she needs.
Why is it that none of these geniuses see this? You don’t give money to bail out banks and think they will use it to help the economy. The banks are just sitting on the free
taxpayer money, using it for bonus money, dividend money, acquisitions, and further tightening the credit noose on everyone else. You want Americans to buy cars? Give them the money, in the form of an “auto voucher” that can only be redeemed at a car dealership for the purchase of a new or used vehicle. Car sales will skyrocket and the big three will be booming in no time, opening new factories and creating jobs. All those millions and millions of auto workers, suppliers, dealers and, yes, even the used car salesmen, will keep their jobs too. If you “inject” the money at the bottom, where Average Joe spends his money each day, you get a very different result in terms of immediate economic activity. And I’m not talking about a paltry $300 tax rebate check. The money already used to bail out banks would allow every US citizen a nice fat check for $30,000. now. They’d spend it, and deposit it in the banks the old fashioned way, and this is how the banking system, and employment, would stabilize. People with jobs pay their bills—even their credit card bills. People with jobs put money in the bank, in this scenario money comes in to the banks from the bottom of the financial pyramid, not the top where it tends to vanish into the bank’s balance sheet with accounting tricks, and downright fraud. Bernanke and Paulson sat before congress pledging transparency. A month later Bloomberg is suing the Fed because Bernanke won’t disclose who is getting the bail out money. See what I mean?
The argument against this grass roots approach to ‘fixing’ the broken economy is that it would hyper-inflate by suddenly putting all this bailout cash into circulation. Strange that they don’t make
that same argument when the bailout bucks go directly to the banks at the top of the economic pyramid, where they will use it for their own interests. Eventually it will trickle down, much debased, to the real economy, but the
bankers get the strong dollars up front. So you can pour on the ‘liquidity’ at the top, giving free money to banks who may eventually get around to lending some of it out to consumers, collecting interest on it as
profit when the money was given to them by “we the people” in the first place!
Thomas Edison and Henry Ford agreed with this argument, and Edison wrote: “It is absurd to say that our country can issue
$30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people…Look at it another way. If the Government issues bonds, (to the banks) the
brokers will sell them. The bonds will be negotiable; they will be considered as gilt edged paper. Why? Because the government is behind them, but who is behind the Government? The people. Therefore it is the people who
constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency… instead of the bankers receiving the benefit of the
people's credit in interest-bearing bonds?”
The real problem with any solution involving re-inflating the economy, whether applied at the top or the bottom, is that we are not going to spend our way out of the dire circumstances we are now
facing. It was reckless consumption, spending and lending that created this problem, bankrupting our nation, our banks, corporations, and people. The dream of more spending is just a desperate attempt to restore our old
standard of living and status quo. It will fail. The only solution to our problem is to take our medicine now, allow the bad assets to fail, the corporations that traded them to fail, and to endure the hardship that causes
while we rebuild an economy based on value and savings.
The answer Mr. Edison’s question is presently this: the banks want the money, and they have the political and economic influence to get it, particularly when
the people who are doling it out are...bankers. Period, done, over. They could care less about “we the people” who provide it to them. Just looking at what they have done throughout this crisis is ample
evidence to that effect.
Throughout history, when this kind of abuse of power and privilege has destroyed social order, the people have done some amazing things. You can ask old King George in 1776, and you can ask King
Louie of France, and you can ask the Romanovs of old Czarist Russia. Just last week the people of Thailand virtually shut down the country in protest against rigged elections…and they toppled the illegitimate government.
“We the people” will do things the banking elite may not count on down this dark and dangerous road we are on now. And believe me, throwing the credit card statements in the round file will just be the beginning.
John Schettler
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