Not Just About Dollars and Cents

Wall Street analysts and "strategists" are notorious for ignoring or glossing over the broader ramifications of their recommendations and forecasts.

Many don't think twice, for example, about telling corporate managers to slash jobs, pensions or health benefits to boost margins. They refer to economic downturns as though they are simply downward-sloping lines on pieces of paper. "Losses," "corrections," and "adjustments" are mainly about bookkeeping entries, not disrupted lives and locales.

Still, my guess is that following all the blood-letting at U.S. banks and brokers, as well as the thousands of layoffs they will be implementing, at least some of these formerly detached, but suddenly jobless, underemployed or less-highly-paid commentators will be forced to start thinking about, as the Economicrot blog details in a recent post, the "Social Implications of a Significant Economic Downturn."

I think many readers will agree that, with the US housing bubble deflating and credit markets deteriorating, many of the things that we have previously taken for granted (easy money/credit and the ability to roll over debt, rising asset values, cheap imports, fairly strong job market, exported inflation, sound banking/financial systems, etc) will soon come to an end, and our economic landscape will significantly change.

For years, due to US dollar hegemony, a tremendous US appetite for consumption and a masqueradingly sound banking/financial system, our economy was very fortunate to have had the privilege of absorbing nearly 80% of the world’s excess savings. This foreign savings was recycled back through our system, allowing for the creation of new loans, provided the fuel for increased consumption and it permitted us to live far beyond our means.

Recently however, many foreigners (who previously wouldn’t have given second thought to investing their savings in the US) were burned with what they thought were “can’t-lose” investments and the falling dollar has exacerbated their losses… I imagine it will take a long, long time for many to forget the deliberate deceptions that led to their losses and I expect to soon see a large portion of these massive savings inflows diminish.

The eventual loss of this foreign savings component, when coupled with the seizure in global credit markets and increasing financial write-downs/losses, has a good chance of snowballing into a major crisis that could potentially impact each and every one of us in a very serious way.

Some feel the final endgame to our party of excess will be hyperinflationary in nature, whereas others fear a future of stagflation or hyper-stagflation; many more feel deflation and depression will result (personally, I think it will be a combination of the above), but regardless, whatever the outcome, I think we can all agree that it has the potential to be very bad.

With that said and understanding that major change is on the horizon, what can we expect the social implications to be? Almost certainly, consumer spending will fall and layoffs will increase but will we eventually see:

Banking runs

Food Lines

Widespread homelessness of entire families

Food Shortages

Riots/Upheaval

Social Chaos

I don’t think any of us really know, but depending on the severity of the situation, I imagine absolutely anything is possible.

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Comments

[Rocky]

You'll know things are really getting bad when the politicians have the guts to tackle super inflated public safety pensions in California. We're not there yet.

[Sackerson]

... but if public sector workers find they can't count on their pensions, presumably this will lead to demands for higher pay, or reduce the number of applicants for public sector work, such as schoolteaching. Unless you're thinking of a shakeout in middle management?

[Rocky]

Public safety equals police, firefighters, prison guards etc, not teachers. When a retiring police officer in Vallejo, CA can get a lifetime pension of $200,000 + per year as early as age 50 with 30 years of service, you know you have problems. Public safety employees have this uncanny ability to get lots of overtime in their final year of employment, boosting the compensation on which their pensions are based. Too bad the state legislature did not have the balls too amend government employee (state and local) pension laws to limit final year compensation for pension purposes to base salary only.

[Sackerson]

Sorry, Rocky, didn't spot the difference. $200k per year pension? Unbelievable! In fact, under our new UK pensions legislation, also now unachievable (we have a legal maximum equivalent pension fund of around £1.5 million, which would yield an income of maybe £70k or USD 140k).