The Bailout Cometh!

The US economy is in a recession and most likely will move into an extended depression. The data speaks to us. The twenty-year expansion of Reaganomics mirrors the rise of Corporatism in the twenty-year period from 1910-1930. The Biotech, Technology, Internet, Housing, and Financial bubbles resulting in artificially high Price/Earnings multiples correspond to the same irrational exuberance of the stock market euphoria of the 1925-1930 bubble. The same disregard for labor, favoring thinking jobs and fraudulent money making schemes find unnerving similarities. Collusion between business and government in the 1920s is superceded only by the corruption prevalent today.

Our politicians have been surprised by the downturn. Perhaps this is due to the influence of Wall Street in government. The recession is not new news to those of us away from the Ivory Towers. Suddenly Investors have lost faith in the smoke and mirrors economy proposed by the US financial system and Washington DC is suddenly, in just a few weeks, aware that America is in trouble. The Bailout cometh! Being good Corporate Lackies our politicians want to buy their way out of the problem. The politician’s only concern is that too many Americans will become financially smart and pay down personal debt instead of spending the money in retail America.

The plans vary in form but both sides agree on the amount to spend, about 1% of GDP. The thinking is that this amount will keep America from registering negative GDP, everyone will feel better and continue spending money they do not have. This intervention will not work. The politicians are reacting to what their corporate masters are telling them is the problem while remaining ignorant to the cause and effect relationship of Reaganomics. Corporatism makes corporation America richer while there is equity. When America no longer has residual equity then Reaganomics feeds on itself as corporate America finances, without sufficient assets to guarantee the loans, purchasing. In other words, corporate America is now eating its own body to feed consumption.

This Bailout will not work. It may give some immediate sense of well being however the structural problems remain. Future GDP will not meet expectations. The elimination of 30 years of smoke and mirrors growth will leave significant scares. In the financial institutions the leveraged credit products will no longer generate revenues and depending on how the government records the losses will either reduce GDP for the last 10 years or drop GDP this year by 12%. Credit Card losses will also reduce revenues for the institutions as they take right offs to cover historically high defaults. The loss in family wealth caused by tanking housing values will further create pressures. The financial institutions still have not begun talking about write-downs for houses they own after foreclosure where owner equity was less than the depreciated asset for sale at auction. In the 1980s this fact alone caused the Savings and Loan Crisis.

The Service Industry Revenues will also be damaged as housing, which represents 28% of GDP, slows and finally stagnates. No more sales commission, housing warranties, insurance policies for the purchase of new homes, inspections, flips, and the likes. Long gone are the days when housing appreciated 20% a year because “they are not making any more land!”

In the past America has had a healthy agricultural and production economy. Today these combined only correspond to 12% of GDP. If the service economy is in the critical care unit how can we think that GDP will not suffer proportionally? Government home surveys indicate that 45% of adults in America do not have a job. This most likely corresponds to our true current unemployment rate. If the US economy drops another 10-30% unemployment could reach levels never experienced in the US.

Why all the Doom and Gloom? An informed individual has a greater probability of surviving difficulties than someone living a Pollyannistic existence. Watch the signs. Look for financial institutions to talk about credit card deterioration followed by questions about the housing portfolio held by the institutions. Watch for layoffs in the financial and insurance sectors. If you do not see new production plants opening in your area will be a precursor to serious problems. If you can go into this period without debt your chances of survival are higher than those saddled with debt. Regarding investments remember, “Cash is King!”