'A Permanent Condition Rather Than a Storm to Be Weathered'

According to the "experts," the recession is over. What's it going to take for them to realize that while the first phase of the Great Unraveling might be drawing to a close, the outlook is shakier than it was at the beginning of the downturn. Why? Because not only are most Americans in worse financial shape than they were two years ago, their attitudes have undergone a secular transformation, as McClatchy suggests in "Living in Economic Downturn Has Become the New Normal":

MODESTO, Calif. -- Vacant storefronts, abandoned homes and shuttered schools tell the story of the economy in the Northern San Joaquin Valley: This is the new normal.

People are beginning to look at the 3-year-old economic downturn as a permanent condition rather than a storm to be weathered.

Modesto is looking at $8 million in cuts this year from its $106 million general fund, the money that pays for essential services such as police, fire and parks, Mayor Jim Ridenour said. That number is down from the city's $130 million general fund of its 2006-07 budget year.

School districts around the region are feeling the pain, as well, with declining enrollment and the steep drop in tax revenues leading to layoffs, pay cuts and campus closures.

Businesses have closed or cut back drastically.

"For lease" signs line commercial strips and office complexes. Important tenants such as Gottschalk's, Mervyn's and Circuit City left gaping holes in shopping centers that, as a result, get less traffic.

Often the nation's car theft capital, the region earned another dubious title when it led the country in foreclosure rates. Weeds overtake lawns at homes abandoned by people who could no longer afford to pay for them.

Kelvin Jasek-Rysdahl, professor of economics at California State University, Stanislaus, and co-director of the university's Center for Public Policy Studies, recalled a presentation he gave in November 2008. It was just before the government officially recognized the country had been in a recession for more than a year.

'Hindsight is 20-20'

"The projections then among several groups of economists were that this might last through the first quarter of 2009," he said. "Hindsight is 20-20, but obviously nobody predicted this."

Wrong. Plenty of people "predicted this" (excerpt, of course, most economists). Why are those individuals who didn't see this coming the ones who keep getting asked for their opinion?

Comments

[Market Seer]

I have a friend on wall st that has been working there for years, has been spot on with stuff...and tells me stuff before it happens. I sat down with him for a drink over easter, and talked about what is going on....he was saying the commercial real estate collapse is very near now...so he was telling me and the wife to brace ourselves. Interesting. Time to buckle up people and stop listening to the lies of the government and media.

[NowWhat]

My parents sold their house in 1 week.

[Mygrandkidsfarm.blogspot.com]

I can't figure out what there was to predict, prices in Modesto were way above replacement back in the '90s. Since WWII (that isn't wii misspelled) the average time between peaks in the r.e. cycle had been 7 years, the last peak happened in the late '80s.

I'm no guru, anyone with access to google and who actually wanted to know could have read the writing (search "history of home value"). Anyone who I knew didn't even need to know how to read, I started talking about it after the dot.bubble didn't slow things down and a friend with an IRS lien got a mortgage without a credit report or even job verification. My line was "if you are going to downsize or move from CA ever, ya better make your move." But alas, none listened.

Oh well, we sold a rickety old 1,100sf farmhouse and 1 acre outside Modesto for 2.5 times our purchase price 5 years earlier and paid cash for a 40ac farm and 2.200sf oak framed 2-story house in the midwest. I telecommute now, just like most people will do somewhere down the line...

[Mark]

I'm not yet convinced that there is really a "new normal" yet.

Why? Because people don't change easily. And as long as the government supports consumption with low interest rates and all sorts of programs, I heavily doubt that people start to walk in the exact opposite direction.

Let me be clear about this: people change if circumstances do not allow them do pursue a more convenient way.

The mortgage defaults exploded. Why did auto sales explode at the same time? Could it be that mortgage defaults free up income which these morons then use to buy new cars at zero interest? I bet on it.

Why? Because of human evolution. It is hammered into the genes of humans to delay inconvenient stuff. That's the reason why easy credit is possibly worse than a nuclear bomb. It allows to delay necessary decisions that are hard to execute.

Please compare the current situation with the 70s inflation period. Subtract a few percent inflation and we have a quite similar situation (in some respect). Many wonder why inflation was so persistent in the 70s. I think it was optimism embedded into the social fabric, maybe as a result of the 1968 generation and/or a relatively good economy and/or relatively low debt levels (compared to today). The politicians tried to increase employment with monetary stimulus. They are trying the same B.S. nowadays. And things will change when government policies change. Not a microsecond before that. (at least that is my hypothesis based on evolutionary instinct that tries to avoid current pain -- some principle marketers heavily rely on with their zero upfront cost schemes, 0 interest schemes etc., central banks with their low/negative interest schemes ......)

My question is therefore: how long will it take to make US politicians rethink their reflation hypothesis and start encourage savings by raising interest rates? Will it again take a decade? Didn't it already take a decade? ... I think it will happen when it will be obvious to do so. Before that it will probably be considered as too risky.

"Why are those individuals who didn't see this coming the ones who keep getting asked for their opinion?"

Because it is much more convenient to do so. You don't have to think for yourself. And non-pain answers make you happy, which is an absolute requirement for most people (bear markets usually are much shorter and less ordered than bull markets..).

[sharonsj]

The new normal is millions of people who can't find a job, or they find a less-paying job ("Hello, welcome to Walmart"), or a part-time job ("Want fries with that?"). In all of these cases, they will no longer have an income that allows them to consume at the old rate. Couple that with rising prices and taxes, and a lot of ordinary people will be squeezed to the breaking point. I can't wait for the revolution.