Welcome to the 20-Year U.S. Recession

by: stirs
05/09/09

Since World War II the average length of a U.S. recession has been a mere 10.4 months. So it is difficult to imagine any recession lasting much longer than the current one, now in month 18. But it will. To prove the case, let me provide some background first.

Prior to the mid 80's, household debt maintained a healthy ratio of between 40-60% of disposable income. This meant that if, after taxes, you took home $50,000 a year, roughly half that would go to your mortgage, credit card, car loan, and other debt payments each month.

Then, around 1985 we began to grow a "Super Bubble" in the United States, where household debt shot up to over 140% of disposable income. This bubble was created by the banks as they provided more and more credit over the course of the next twenty years. Your credit card balance increased, the amount of money you were allowed to borrow to buy a home exploded, credit lines for education shot up, virtually every possible way you could get yourself in greater and greater debt increased exponentially.

The problem with this is that it does not make us any richer. All the credit bubble did was make us feel richer as we bought more things while we continued to bury ourselves in a mountain of debt. The other problem with the banks doing this is that it causes prices to go up on everything. So the rules of the game are, as credit increases in a society, prices go up and the individual goes into greater debt. Was this really good for America? That is another topic for another time. For now, we must deal with the consequences of our 20-year debt binge, which is the Great Unwinding.

All things must come to an end. And whenever a society goes into a long-term debt binge, it always ends with a crash. It is sort of like throwing a ball up into the air. There is a peak to how high that ball will go but once it reaches that peak, it will come crashing down to were it started. That is exactly what is happening now, the debt bubble is coming crashing down to where it started. That means all the jobs that were created by debt spending, all the business that sold goods that people bought with their debt, everything that was debt driven, is going away. It was all fake, all a mirage. Because the only real wealth of a society comes from producing real goods and services that it sells to the world and gets paid real money for. That is the only way America can ever become rich. Debt is only a temporary feeling of rich that vanishes in time.

The problem we have now is that while the free market is trying to destroy all the debt we built up over the last twenty years, our government is determined not to let it happen. Not only are they not allowing our economy to purge itself of debt so we can all get back to living within our means, they are trying to create as much additional debt as possible in order to "save" the economy. The massive government spending going on right now is going to, over time, suck the lifeblood out of our economy for years to come.

One good example of this is the Bush and Obama administrations' decision to bailout the banks and other business instead of letting them fail. There are two sides to this coin and they are both negative. The first is that in a healthy recession, these businesses would be allowed to fail, the debt would be destroyed, all the stupid CEO's and management teams that ran these companies into the ground would be gone and the better and smarter companies would buy up the assets of these failed companies for a cheap price in bankruptcy court. The result: the smart companies take over the business the failed companies lost and these industries begin to thrive again as the toxic parts of those industries are purged.

Compare that with what our government decided to do. Take billions of our tax dollars to bail out the corrupt and failed CEO's, management teams and business so that they can stay in business and compete against the smart guys. Only we have given the dumb guys an advantage by providing bailout money that they didn't deserve. What do you think will happen to those industries over the next twenty years? They will never get purged of the failures and they will suffer for twenty years or more. They will be less productive, they will be less innovative and they will make America less prosperous with their stupid decisions. But the other side of this coin is even worse. The bailout money given to these business will suck out the lifeblood of our economy for years to come. Our taxes will have to go up to pay for the increasing debt and that means less and less of our money will go into our economy to allow us all to grow and prosper.

A good rule of thumb is this, for every $100,000 that private industry spends, two jobs are created. For every $100,000 that the governement spends, one job is created. So the more money that is taken from private industry (higher business taxes, higher taxes on your salary, higher sales tax), the fewer jobs are created and less money is being spent in our economy to allow it to flourish. This is basically because the governement wastes a large percentage of the money it spends so there is much less left to help stimulate the economy compared to a much more efficient private industry.

Over time, this mountain of debt that is being created through bailouts, stimulus programs, increased social programs, and everything else is going to drain our economy more and more every year. The interest payments on that debt will increase, our taxes will continue to go up, less and less money will ever get into our economy in the first place to allow it to grow. The debt levels that are currently being built up by the Obama administration are so extreme that they will literally keep us in a recession for 15-20 years. If you don't believe me, study Japan. They are in their 19th year of a recession after hitting the pinnacle of their debt bubble in the 80's then pursuing massive bailouts and stimulus plans every year that are almost exactly equivelant to our own. The similarities are striking.

Will we have dead cat bounces over the next 20 years? Absolutely. Japan has had a number of dead cat bounces that lasted for several years at a time. But the deep indebtedness the country created for itself through bailouts and stimulus and the persistent efforts to keep failed companies alive suck billions out of their economy every year even 19 years later!

So you will see a dead cat bounce probably at the end of this year for the United States and it may last six months, nine months or even a year. But be prepared for a severe second dip into a recession as the debt wallops us over the head like a two-by-four after the bounce. Even more troubling, the countries that are buying this debt so that we can keep spending our precious money on failed companies and stimulus plains that have historically proven not to work in the long run, will demand that we pay them higher interest rates on the loans and will further suck the lifeblood out of our economy and cause our own interest rates on everything from home loans to car loans slam us into a perhaps even deeper recession in 2010.

Be prepared my friends. The bailouts and insane spending your dear government is currently taking will catch up to us when we all least expect it (probably around the middle of 2010) and by then it will be too late. The money will have been already spent. The corrupt banks and auto companies will have already been bailed out yet again. And we will have nothing to show for it. All because you did not get involved, call your congress person and demand that the American government start living within its means just like we have all learned to the hard way.

We have chosen our own future by our own complacency. One more thing, American wasn't always like this. Up until the 1970's, America was a lender to other countries, not a debtor. We used to be responsible with our money and spend only what we made. If you want America back call your congress person today. Your future and your children's future depend on it.