Jim Cramer, resident guru on CNBC, aimed some cautious optimism at the resiliency of the stock market yesterday, but whether or not his suspicions are born out, it must be remembered that he’s only talking about Wall Street.
It’s a different picture on Main Street. A growing number of people are in serious trouble and, unless you happen to be a capitalist in the financial sector, little of the suffering is likely to be relieved by the government. Analysts are now recommending that ordinary people should have enough savings on hand to get by for nine months to a year.
And that particular advice would appear to fall squarely in the category of being “too little and too late.” The general public, in fact, may be among the last to be informed of the seriousness of the economic contraction.
Those corporations that are in the country’s vital industries seem to have been forewarned well in advance. For example, every one of the top five companies in the oil, defense and pharmaceutical industries, without exception, managed to amass a record amount of cash and cash equivalents on hand by the time the turndown commenced.
In addition, our key politicians appear to have been forewarned. How else to explain the seemingly unnecessary, yet unprecedented, executive and legislative moves to protect the country against civil unrest? These defensive actions included the authority to suspend basic rights, legislation to overturn the protective covenant known as the Posse Comitatus Act which, for 130 years stood as a silent barrier against governmental abuse of power, and the construction of new federal detention facilities, many of which are still awaiting unknown future occupants.
And, as for the public at large – well, we’re just now being told that a recession actually started 12 months ago and that we’d better have plenty of savings available. Somehow, this whole situation just doesn’t smell right.
In any event, we are definitely in a recession, and what makes it unique in a very bad way, is that, in addition to being global in scope, it is accompanied by two other developments – a financial crisis featuring a historic credit crunch – and a real estate collapse, the extent of which has not been seen since at least the Great Depression.
These two additional elements are exactly the reason for the current alarm, because without a functioning financial sector and a surging real estate market, the economy is lacking its traditional lifelines.
In every one of the ten previous recessions since World War II, the normal drop in interest rates associated with the turndowns fueled the financial and real estate portions of the economy, which enabled them to pull the economy back into a recovery mode.
Today, you can look at these sectors as you would at a patient whose heart has stopped beating. The paramedics – the Treasury, the Federal Reserve, Congress and the present and future administrations – are all on the scene. And CPR is being applied in the form of an unprecedented infusion of funds.
But, so far the body is unresponsive. Naturally, time is of the essence and this is reflected in the frantic nature of the resuscitation attempts. If there continues to be no response, death will follow and rigor mortis will set in – a general condition that will be called a depression, and one that we are hearing more about, by the day.
Depressions are rare. The National Bureau of Economic Research, which belatedly declared the recession last Monday, has no parameters to determine if and when a depression might start or end. Officially, it doesn’t even know when the Great Depression began or ended.
The general definition of a depression describes it as an extended period of falling prices, or deflation, accompanied by increasing unemployment and a reduction in the production of goods and services. It is the economic equivalent of “shock and awe.”
The current fear of this scenario is based on the fact that the limited history of these types of events indicates that a depression is an extremely difficult cycle to reverse.
As prices fall in a period of deflation, businesses trim their inventories which are losing value on the shelves. Consumers, at the same time, begin to postpone their purchases in anticipation of cheaper prices down the road. As a result of the foregoing, businesses further reduce production and lay off more employees, which results in a continuing deterioration in consumer spending – and the vicious cycle is off and running.
Those who do have an idea as to the timing of the Great Depression say that it took World War II to finally pull the nation out of it. And it was 25 years before the Dow Jones Industrial Average returned to its 1929 level.
This is why you could realistically say that the current effort to stimulate business activity is on a war footing. The U.S. government has now committed $8.5 trillion to the cause of reviving the economy, of which $3.2 trillion has been spent so far.
The efforts to date, however, have seemed somewhat clumsy and inconsistent. Little restraint appears to have been attached to bailing out financial institutions such as AIG, which has seen its commitment from the government increase from $80 billion to, now, $150 billion, with no oversight involved.
Yet, the CEO’s of the three big domestic auto companies have been raked over the coals by Congress on two occasions lately, in their unsuccessful quest for $25 billion initially, and their most recent unresolved pitch for $34 billion. In the process, the CEO’s have agreed to work for $1 per year and the union has offered some relief from the auto workers as well, conditions that have not been imposed on financial institutions, incidentally.
Sure, there are reasons to dislike the auto executives, but the companies they represent directly employ 395,000 workers, and Bloomberg News reported today that one tenth of all the jobs in the nation are in some way related to the domestic auto industry.
It is strange, therefore, that as of now, with one or more of these companies on the verge of bankruptcy, Congress has not yet been able to get off the dime and make a decision.
Nevertheless, Herculean efforts are indeed being made to get the banks to start issuing credit, but, here again, it seems that no discernable success has been achieved so far. Lack of funds from their banks is, in fact, the reason for the auto industry’s sudden perils.
Even the State of California cannot get its banks to come up with the operating funds it needs and it is now considering the use of depression-era IOU’s. Ironically, this will transfer the problem to the state’s payees who, in all likelihood, will find that the banks won’t honor the IOU’s either.
Due in large part to the government’s unprecedented rescue efforts, the national debt rose by over $1 trillion in the 2008 fiscal year which ended on September 30. October then recorded the largest monthly deficit in history – over $400 billion – and the deficit is now expected to reach $1 trillion for fiscal 2009.
And yet, not only is the problem in the financial community totally unresolved, the problem in the real estate sector hasn’t even been effectively addressed. Currently, 10% of all mortgages in the country are delinquent or in default, and foreclosures are occurring at the rate of nearly 10,000 per weekday, a figure that translates into more than 700,000 men, women and children losing their homes each month.
Difficult as it might be, it is absolutely essential that the problem be treated as if it was a contagious disease and quarantined. The high rate of foreclosure activity must be terminated at all costs, for only then can the balance of the real estate sector, in conjunction with a reawakened financial community, begin to revive the body economic.
President-elect Obama will hit the ground running immediately after his inauguration in six weeks, and he is promising a stimulus package aimed at creating 2.5 million jobs. With job losses totaling 1.25 million in just the last three months this will be a much needed program, but is it, in reality, little more than a band aid?
10 million Americans are now reported to be unemployed and millions more are working at jobs below their level of proficiency. Let’s hope that Obama’s program succeeds to a greater extent than what we have seen so far.
Much of what occurs in the business world is dependent on confidence, however, so the president-elect’s most important contribution may just turn out to be that he brings enough of that with him to make a difference.
Dave McGill, News Correspondent
Dave’s column, “The Contrarian,” generally published every Friday, to Gather Essential News will sometimes present a contrary view to various aspects of the news, or an alternate take on the conventional wisdom of the day, and will often appear on other days of the week
Dave has been a senior officer of an eastern insurance company, involved in economic projections and investment strategy, president of a Midwestern mortgage banking company, and a financial consultant in Southern California, serving clients in the field of commercial real estate development.
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