Saturday, September 19, 2009

Trough between waves, or pre-tsunami lull?

According to Federal Reserve Chairman Ben Bernanke, the recession is probably over, but I'm following several blog commentators who are making reasonable arguments that the worst is yet to come. The question is, "Who's right?"

It seems to me that debt is the one broad issue that distinguishes the two opposing viewpoints. A diverse group of pessimistic online pundits like Mike Shedlock, Karl Denninger, Max Keiser and bloggers on argue that we are near - or have already exceeded - a total debt threshold that can no longer be sustained. When all forms of debt are considered together, including the Federal debt, mortgage debt, consumer debt, etc., the picture looks pretty grim. Total debt as a percentage of the nation's gross domestic product (GDP) was remarkably constant for decades, but started to increase in the mid 1980's and has been growing steadily ever since.

Karl Denninger has made a graph that breaks down the debt into categories, and it clearly shows that a recent retreat in mortgage debt and consumer debt has coincided with an accelerated increase in public debt.

It doesn't take a genius to realize that private debt (much of it owed to a few large banks) has simply been transformed into Federal debt over the last year or two by way of the trillion-dollar bailouts/stimuli. Notice too that when the Federal debt momentarily stopped growing in the late 1990's, mortgage debt growth kicked into high gear.

On the other side of the debate, the people in high offices who were proponents of the bailouts and stimulus packages, and who are suggesting that the worst is now over economically, are noticeably silent on the subject of the ballooning Federal debt. I'm neither an economist nor an accountant, but I'm pretty sure that debt can't increase forever without major negative consequences. It also makes sense to presume that the greater the debt is when the bubble finally pops, the greater the pain will be.

I'm afraid the economic pessimists have made stronger cases than the optimists up to this point. To some extent the current reprieve in corporate earnings and stock markets has to be the aftereffect of the astronomical Federal spending programs, but I fear that this only delays the inevitable day of reckoning, and ensures that the eventual fall will be deeper. The most reasonable solution - letting banks fail when they take too many risks and slashing the Federal budget - is still painful in the short term, but would ultimately lead to a sustainable recovery more quickly. However, elected officials in Washington are too worried about their own jobs to suggest such "heartless" measures. They would rather bail out the irresponsible banks, increase the national debt, and print money like mad to keep voters placated at least until the next election.

Much of the current economic data supports the pessimistic outlook. Unemployment continues to rise, a new round of mortgage defaults looms, the dollar is losing its value internationally, and state governments who can't print money like the Feds are running out of it.

I've been doing my best to plan for the worst, but I wonder if there is even any "high ground" to run to in this case. (The folks in this video saw the tsunami coming and got out of the way just in time.)


The Western Chauvinist said...

Dude! Your blog is looking, shall we say - apocalyptic these days. Not that there's anything wrong with that. I happen to think you have it right. Plagues, pestilence and tsunamis. Yeah - that pretty much covers it.

The hubby and I drive around town asking each other, "what has changed?" in regard to the easy money problem. The billboards advertising new housing developments still say, "NO MONEY DOWN." Only the prices have been updated (reduced), meaning, of course, the house we're paying off is worth less than it was. Yep - I think you have it right. This administration isn't going to do anything to address the easy money mess - so the tsunami is coming.

J. Wilson said...

Not to add insult to apocalypse, but don't forget about the increasing threat of war around the globe. (China, Russia, Iran, N. Korea, Venezuela...)

Buckeye Strong said...

Just a few questions. Where is the high ground?
Knowing that there is a good chance the dollar is going to crash and burn where should we invest today?
What can we do today to try and help ourselves if and when things fall apart?
As a famous person once said trying to tax(spend) yourself into prosperity is like standing in a bucket and trying to lift yourself.
I really hope I'm being paranoid.

Jody Wilson said...

Yes, that famous person was Winston Churchill.

The bad news is that we've actually got a bigger problem than high taxes. Our total debt burden of mortgage payments, credit card payments and Treasury bill payments (interest on the Federal debt) may already be too large to ever pay off. The solution up to this point has been to fill the Federal hole by printing money. If they raise taxes sufficiently to make the Federal payments and restore state budgets, then one wonders how we'll be able to afford *any* mortgage payments.

This situation is too far beyond my experience for me know what to do. The folks in Washington, D.C. are only adding to the uncertainty by not having an open and consistent policy for dealing with the crisis. If they would just announce "we're going to print our way out of debt," then we would be able to plan ahead and buy assets that hold their value during inflation. However, for all we know they could stop printing tomorrow and start raising taxes instead.

The only thing I'm willing to recommend is to plan for a little bit of everything by diversifying. Prepare for inflation (metals or anything that holds value) higher taxes (take care of major purchases or taxable withdrawals now) bank closures with deflation (hoard cash and have more than one account) and even civil unrest (self defense).