Economic indicators point towards a depression. Signs are everywhere. We began speaking about this last week. Today, we’ll begin to look at these economic indicators so that you can see for yourself the signs of depression.
Western Governments, lead by the United States, have for decades utilized the printing and borrowing of money along with simultaneously keeping artificially low interest rates, in order to create a series of booms and busts in the economy. Each depression (bust) was followed by a subsequent boom in another market as all of this easy money flowed to an asset class which had not yet experienced this cycle. After the Great Depression, the government changed the labels they gave to economic cycles. What used to be called a depression was now labeled a recession, so that people weren’t spooked into thinking another Great Depression was coming. However, the economic indicators do point towards a very hard depression.
We saw in the late 90’s a stock market boom which was followed by a stock market bust in the early 2000’s. The hot money then moved to the real estate market where boom was then followed by bust. Each time, the level of risk being accepted by market participants increased. The latest boom and bust was seen in the financial sector as they began to reap the consequences of massive, non-collateralized, and inherently risky positions.
However, these most recent busts were not allowed to find their natural conclusion. The US Government (and others) felt that the participants should be protected from the natural market penalties their foolish actions dictated and instead took all the financial consequences onto the back of the US Government as if WE THE PEOPLE could afford to pay them. Real Estate Markets were not allowed to crash as completely as needed to clean out that system.
Instead, one government program after another was initiated to keep (or put) people in homes they couldn’t afford so that market prices would remain elevated and people wouldn’t panic. All this accomplishes however is a delay of the inevitable crash that must and will take place. Let’s take a look at a couple of these government programs:
- Government guaranteed mortgages at rates too impossibly low for any real banker to offer (Today, 97% of all US mortgages are underwritten by a US Government sponsored entity!)
- Cash Giveaways to Buyers of Homes for Purchasing Now (rather than a few months from now…it’s doubtful they convinced people to buy who wouldn’t have bought, but they surely moved 2010 and 2011 buyers up in their purchase plans. I know several who took advantage of this in exactly this way.)
The Banking System began to crater in 2008. Banks had foolishly allocated capital where there was no collateral ensuring the success of their enterprise. The highest profile occurrences were 1) the writing of mortgages doomed to fail on properties with impossibly high appraisals to borrowers without the means to pay & 2) The purchasing of derivatives which they did not understand because they appeared to be a quick way to make an extra buck. Greed overcame Prudence. Rather than allowing the weak banks to fail so that they entire system learned a lesson while suffering through a recession so that the wise and strong banks would grow to dominate the system, the government allowed the most reckless and weakest to survive by initiating more government interference in the market. WE took the consequences of the banks actions onto the back of the US Government. Our Leaders felt that it was better for WE THE PEOPLE to pay the price of this foolishness rather than the government. Perhaps they were ignorant enough to believe that a price would not have to be paid, or more likely they hoped, it wouldn’t happen while they were in office.
Bank Rules were changed so that Banks do not have to Mark Assets to Market. This means that banks are able to hold assets on their books at the price they were originally sold rather than acknowledging that in the current market, they are worth far less than they what the books say. This has multiple affects. The banks are incentivized to delay foreclosing on a property because they will then have to recognize a massive loss on their books. This both delays the real estate market finding its true bottom valuation and allows banks who are very unhealthy to stagger along pretending they are much healthier on their financial statements then they are in reality.
Even with this, banks are failing at an unprecedented rate. The FDIC has said this will be a huge year for bank failures and they have opened 3 new offices because they don’t have the manpower to close all the banks which need to be closed. We’ll look at more economic indicators soon, but you can see from these main drivers of the economy, things look tough.
Photo credit: edpugh