'Gone, Over, Toast.'

It's interesting how short-sighted many so-called experts are when it comes to understanding the pace and path of forces swirling through the economy.

Even when it was apparent to everyone that the bubble had burst in housing, for example, some forecasters were predicting that municipal finances would not be seriously affected.

Aside from wishful thinking, one reason for the cognitive dissonance appeared to stem from the fact that people were not getting immediate reports from state and local officials that budgets were being wracked by falling revenues and rising costs.

Yet that should not have been a surprise to anyone. There are in-built delays, such as the time it takes to build a house or the grace period allowed for tax receipts to be remitted to authorities, that would postpone the moment of reckoning for months -- or longer.

The same holds true in terms of the state of the overall economy. The optimists seem to be saying that since today's data are not so bad, fears about a serious downturn are overblown.

As it happens, Charles Hugh Smith, publisher of the Of Two Minds blog, has taken the time to take such reassurances to task in "The Coming Great Depression: Leaving Fantasyland."

Wall Street Journal commentator Peggy Noonan is undoubtedly not alone is seeing no evidence of Depression in America--yet: Turbulence Ahead:

"One of the weirdest, most perceptually jarring things about the economic crisis is that everything looks the same. We are told every day and in every news venue that we are in Great Depression II, that we are in a crisis, a cataclysm, a meltdown, the credit crunch from hell, that we will lose millions of jobs, and that the great abundance is over and may never return. Three great investment banks have fallen while a fourth totters, and the Dow Jones Industrial Average has fallen 31% in six months. And yet when you free yourself from media and go outside for a walk, everything looks . . . the same.

Everyone is dressed the same. Everyone looks as comfortable as they did three years ago, at the height of prosperity. The mall is still there, and people are still walking into the stores and daydreaming with half-full carts in aisle 3. Everyone's still overweight.

But the point is: Nothing looks different.

In the Depression people sold apples on the street. They sold pencils. Angels with dirty faces wore coats too thin and short and shivered in line at the government surplus warehouse."

Peg would be well-served by reading up a bit on the Depression's timeline. As noted here last week, (The Coming Great Depression: Scapegoats and Exploitation) the Dow Jones Industrial Average actually recovered in early 1930 to early-1929 levels. (Look for the same this time around, too--DJIA 12,600 is in the cards a few months out, despite all the structural damage to the market and economy.)

Breadlines didn't form in November 1929--the structural damage took years to play out then, and it will take years to play out now. So don't rush things, Peggy--we'll get to a visible Depression soon enough.

Great Depression: (Wikipedia)

The Great Depression was not a sudden, total collapse. The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929. Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the summer of 1930.

In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing. By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931. We can already anticipate "ample credit at low rates" in 2009, just as we can also anticipate wages holding steady for awhile even as sales fall. The wheels will fall off later in 2009 and deteriorate further in 2010, 2011 and 2012.

Here are the structural realities which have yet to play out:

1. You can't force households or businesses to borrow more money and spend it. Japan's central bank has flooded that nation with liquidity and low interest money for 19 years to little effect.
2. U.S. consumers and corporations are already burdened with staggering debt. Not only can't you force people to borrow more, you also can't force lenders to loan more money to insolvent households and businesses.
3. Whatever money people get their hands on is going to paying down debt and savings. Studies of the first "stimulus package" checks which went out to taxpayers in 2008 revealed that 2/3 of the money was not spent but used to service debt or saved. Future "stimulus checks" will also fail to boost spending; people already have more stuff than they know what to do with.
4. The FIRE economy is dead. Finance, insurance and real estate (FIRE) all prospered for one reason: the velocity of transactions and debt instruments. With the volume of transactions off by 2/3 (real estate) or 99% (home equity loans), the FIRE economy is shrinking fast, with no barriers to further declines. With lending standards rising even as real estate values plummet, there is nothing to stop transaction and debt velocity from falling much further.
5. Governments and corporations alike are living with Fantasyland expectations of revenue. I recently pored over the 2009 fiscal year budget of my town of 120,000 people (general fund spending is $135 million, which doesn't include capital projects or bond-funded spending) and was dumbstruck by the insanely unrealistic revenue expectations.

The city expects to reap the same amount of easy money from real estate transfer taxes (1% of any real estate transaction goes to the city) in 2009 as it did in 2007 and 2008: about $11 million.

Huh? As transaction volumes decline by 2/3 and the sales prices plummet, then how can you possibly expect to rake in the same transfer tax revenues?

The downtown shopping district was eerily quiet on Black Friday; empty storefronts are everywhere, and sales are falling even at the town's sales-tax heavyweights, the Toyota and Honda auto dealerships. Yet the city expects to haul in the same sales tax revenue as in 2008. Based on what?

The entire nation is in the grip of massive, total denial that revenues will drop in a recession. Companies are trimming travel costs, as are consumers; San Francisco International Airport was virtually empty on Wednesday, once one of the busiest travel days of the year. Airports almost empty day before Thanksgiving.

"The dreaded Day before Thanksgiving was not so dreadful after all. Bay Area airports were eerily empty for much of what traditionally has been among the busiest travel days of the year.
"There's nobody here," said Deborah Vainieri, who was waiting at San Francisco International Airport with her husband, Humberto, for a flight to Portland. In a plot to beat the crowds, the Vainieris had arrived at the airport four hours early. They walked right up to the check-in machine and were done in less than a minute."

6. If lenders make risky loans, they will go under--and most U.S. households and businesses are no longer creditworthy risks. So there you have it: This conflict cannot be resolved. Lenders who foolishly extend credit to over-indebted, risk-laden borrowers will be paid back with losses and insolvency, yet as lending standards tighten and assets plummet in value, the number of creditworthy borrowers in the U.S. has shrunk.

As noted here many times: many of those who qualify for loans are deadset against debt. That's why they're creditworthy--they've refused to take on huge debt for cultural or fiscal-prudence reasons. They have zero interest in taking on debt, even at zero interest.

You can't force people to borrow money, especially when they're already overloaded with debt, and you can't force prudent people to borrow when they have no need for more property, nor can you force people to buy real estate even as the values continue falling.

7. The U.S. already has too much of everything: too many hotels, malls, office towers, homes, condos, strip-malls, lamps, furniture, CDs, TVs, clothing, etc. As 50 million storage lockers filled to capacity with consumer crap are emptied in a desperate move to reduce expenses and raise cash, the value of literally everything ever manufactured will fall to near-zero.

As noted here many times before, the entire U.S. housing market was held aloft by two anomalies: speculators hoping to "flip" for huge profits, and a "one dwelling for every person" mentality that confused rising population with a rising number of households.

We are already seeing how population can continue rising slowly even as the number of households declines. It's called moving back home, doubling up, renting out a room, etc. There are at least 20 million surplus dwellings in the U.S. right now; there is no need for 700,000 more a year to be built, or even 70,000 more.

The FIRE economy based on transaction and debt volume/velocity: gone, over, toast. Housing market based on speculative flipping and one-person households: over, gone, toast. Loose lending by delusional lenders to risky, over-indebted borrowers: gone, over, toast. Borrowing based on rising real estate values: gone, over, toast.

The notion that we "need" more of anything: gone, over, toast. The idea that you can force lenders to lend to uncreditworthy borrowers: gone, over, toast. The idea you can force people drowning in debt to borrow more: gone, over, toast.

Comments

[Steve]

Just as a note about expecting people to borrow more. I picked up my latest Citi Card statement, which told me that my interest rate would increase from about 14% to a MINIMUM of 19.99%! (They have not lowered my credit limit.) Now, I will qualify this as telling you that I "own" more than 50% of my house (my only debt), I have no car loans, no slow/late payments on anything, and pay my credit cards IN FULL every month, and have for the last 9 years. I have a government job with a no-layoff clause, and my wife is in health care. We have plenty of savings, and as I mentioned before, thanks to Micheal, I have actually made money in my retirement plan this year.

So, why would I want to borrow, when they want 20% interest in a deflationary economy? Short answer is, I won't.

I have said it before, but thanks again Mr. Panzer. You have really helped me prepare for these times!

[roger]

(But the point is: Nothing looks different.)If you expect change to take place in a jiffy it means you are
still very young and inexperienced,and you have yet not experienced the shock of going back in time, since you move along with time
change is imperceptible, but its there! shockingly there, change
also has velocity it can be an explosion or a slow accumulation of
things.

[sackerson]

A cut flower still looks bright and fresh!

[cyndy]

'Nothing looks different' if you aren't looking.

* We have a storage unit in Michigan filled with several family members belongings. A central place to keep scattered family members 'stuff'. (Yes, rethinking that one) We just got notice that the new owners of the storage complex are in default after having bought the place within the last six months. You explained why.

* Excellent farmland (riverside in the desert, irrigated) is being sold off. I'm assuming they won't be farming, even if they don't sell, and I can only hope the land doesn't fall in the hands of developers. A dent in local future food production.

* When talking to people, I often hear that their family doesn't 'want' anymore stuff, homemade gifts are what they intend to do. A positive change of mindset.

* House pads remaining undeveloped for over a year.

* Insurance company so disorganized as to not cash a rather large check for over a month. (Downsizing staff to the point of hurting themselves?)

* Bridge to nowhere in San Diego

We see these things and comment to each other, 'this is what collapse looks like'.

[purple]

My guess is the Gov will continue trying to re-inflate the speculative economy, alongside massive deficit spending in infrastructure.

The fact is our spending has supported the development of entire nations. Germany has had little domestic consumption growth in a decade, and East Asia is well known for export-based economies.

[K T Cat]

No worries. The Green Economy will save us by investing money on known technology losers.

Or something like that.

[Doug Poretz]

This is a copy of comments I also posted at Seeking Alpha, where your article was also posted:

Very intriguing but I have the following other observations:

1. Officially we are not even in a "Recession" yet -- we have not yet had two sequential quarters of negative growth, which is the defintion of a Recession, as you know. But if we aren't in a Recession, or a Depression, we are in a Something. I think that "Something" is new and should have a new name. For now, I call it "The XYZ Event." I think what we call this economic period is important -- if we use old terms to define and diagnose the event, we will use old remedies. I think this is different from either a "Recession" of the past or the Depression of the 1930s due to some vastly different fundamentals, among them a shft from a manufacturing to a knowledge economy, the emergence of a truly global and interlocked economy, and a radically different communications infrastructure.

2. I think there is a major consequence that you do not account for by virtue of the speed of information now as compared to the Depression and even previous Recessions -- we get information and put it to use much quicker, by an order of magnitude. We know much key fundamental economic data on a real-time basis, and that data we do not know as it happens, we do know very quickly, especially as compared to the 1930s. Improved IT networks and reporting systems allow manufacturers to control inventory much better, allow corporations to adapt budgets quicker, etc. This allows the rapid and almost total "shut down" of spending by both businesses and consumers, as we currently see, but that, in turn, should mitigate the ultimate damage.

3. Most significantly in my opinion, the current economic situation is not attributable to a single event or institution or enforcement or non-enforcement of any regulation, albeit all those contributed to what's happening. I think the innundation of "buy this" messages that have surrounded the American public since the post WW II boom, has led to a culture where "the American dream" is a consumer's dream: buy more, buy bigger, buy more expensive. All aspects of our society became ensnared in that culture -- those who created new debt instruments, those who encouraged their customers to stretch a little more for a bigger and more expensive house, and those who decided to buy a new flat screen TV even though they couldn't afford it because they didn't have to make any payments "until next year." Until we come to grips -- get out of denial -- about the cutlure that gave rise to this economic mess, we won't define the situation correctly -- and we won't be able to remedy the situation until it is correctly defined.

Despite my opinions, I am not optimistic about the economy for the near-term at least. I am, however, certain that the creative component of this destructive period will be very robust and ultimately the world will be better for it. For anyone interested, I express this type of thought and related issues about communicating messages at my blog, www.deathoftime.com -- perspectives of a guy with about four decades in the communications business.

[scott]

How do you know when your in a depression ?
I remember thinking while I was breaking rocks for my driveway last summer because I couldnt afford to buy them , that yea , this is my depression .

But now ,i have a driveway , and I didnt pay any taxes for those rocks , so I didnt contribute to the corporate govt .(didnt help purchase bombs for the pentagon, didnt contribute to bailing out bankers ) And I didnt pay a company to deliver them to me , so I also didnt finance a fat truckers trip to walmart to buy chinese chew-toys for his fat wifes poodle .

So it aint so depressing at all really .
And this summer , that driveway will lead me to my new garden where I will grow my own veggies , which I will also pay no taxes on to the corporate owned govt.
And I may be peculiar , but the more depressed this rotten predatory economy gets , the less depressed I get .
I just hope it doesnt completely crash before I get my pantry stocked with some veggies .

[jammer]

Good article. How do you come up w/ 20 million excess housing units? On surface, that is as extreme as Peggy "Clueless" in the opposite direction. I can see 5 million excess units, without too much stain.

[ron]

excellent description of the coming slowdown. In 1976 we purchased a new home for $28K about 2X our income, that same home without any changes was worth over 600K in 2005 and now list for $435K which is still 16 times its value in 1976 and its exactly the same.
Asset values are going to unwind as the credit deleveraging continue and there value will be based soley on how much cash they generate.
The internet will play an interesting role as companies such as E-Bay and Craigslist provide a easy alternative to the retail store and mass volume manufacturing allowing consumers to buy quality used anything at mark to market pricing. It may also provide a longterm model for the manufacture and production of products created on a custom order basis allowing small regional manufacturing to exist, generating products that the volume manufacturing business finds unable to do at profitable levels.

[Eric]

Excellent article. Basically you're saying that was driving this bubble economy is over. Toast :)

So ... what will fill in those income gaps going forward? That's the question I guess. Economists are talking about how long the downturn will last as if it's just a matter of time until everything booms again. But we get booms, ie phony prosperity, because of bubbles, which require leverage, which requires income to pay it back, which is why the bubbles eventually burst -- the underlying true income/collateral isn't there. The world economy has truly become a Ponzi scheme, best I can tell.

Re: the poster with the rock driveway and garden -- I agree completely! We've been so sold on the idea of having to enrich a chain of corporations for everything we do that self-sufficiency and personal creativiity has become a complete mystery to many.

[No Hyperbole]

You exaggerate:

1. there may indeed be 20m dwellings empty, but there is usually a stock of 14m...the actual number for sale is 6m which is 1y supply...6m supply is normal

2. there maybe 50m storage lockers full of c**p, assuming each of 52k facilities has 1000 lockers. 90% of this, however, is for people who are moving

3. T-giving day travel was robust. To say anything else is to totally distort reality. SF airport empty??? I doubt that...around here is was very crowded on the roads and at the airports.
Your other points don't really say anything. Do you really think there is going to be an entire city of tent people in Central Park? That there will be 30% unemployment?

I think the author you critize had a valid point. It is true our banking system almost collapsed under a mountain of derivatives. It is not true that we are in a depression.

[Kieran]

Did you get 12,600 DJIA just by overlaying a chart of the first percentage down move in 1929 and then predicting a comparable correction wave?

I think a .38 retracement or a .50 retracement of the first down move are as likely as the .6 retrace from 29-30.

Or, perhaps the elimination of the uptick rule will make the party go down quicker than in 29.

We shall see.

We'll see.

[ron]

No Hyperbole: SFO was in fact empty, the Chronicle had a big picture of the main terminal on Wed afternoon and not much was going on, yes very surprising.

[Black Star Ranch]

...the Dow just closed down almost 700 points today. The Terminator California governor is calling an "economic state of emergency" over an $11-billion budget deficit. An old friend from SoCal called a half hour ago and asked why I moved to Nevada. I'd told him today was a perfect example. The banks are insolvent, the governments (all) are spending more than they bring in, more and more people are being thrown out of work, and nobody owns anything other than the junk stacked up in their garage - NOT including any cars parked in there! The sad part is that you really can't tell by what you hear on the news. Both government and business must be afraid to tell us we're "sunk". The reason I moved 250-miles east? My modest home is paid for, I have a clean well & water. My acreage grows vegetables, and supports chickens and a milk cow. I am in a cash friendly state and don't owe "squat".....and, it doesn't take a financial analyst to measure how fortunate I am. I would recommend it to all - it's refreshing.

[wunsacon]

Food banks -- aka soup kitchens -- are seeing record increases. Plenty "looks different" to the people showing up at these food banks.

But, it's nothing that another unfunded tax cut can't cure.