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.

The Stirrings of a Revolution

by: stirs

I am amazed at the current disconnect between the politicians in Washington and the people they serve. These are rare times. There have only been a few times in American history where leaders have so brazenly disregarded the will of the people and when this has happened things generally end in only one way. The slow but powerful stirrings of a Revolution.

Like a beach ball being forced further and further under water, the American people will only be pushed so far. Eventually the smattering of Tea Party protests over tax increases and occasional demonstrations in front of AIG executives homes over theft of their taxpayer money begin to build. Then at some point the anger and passion explodes into a crescendo of powerful revolt and the people that make up the heart and soul of this country take their country back.

Politicians are in some sort of surreal protective bubble where they have become completely tone deaf to what the American people want. The people intuitively know that the cause of this crisis was debt and greed. And the way they solve it is to pay off the debt and stop the greed. The American people are currently working hard to pay off their debt and build a mountain of savings to protect them in the future. We have gone from an unprecedented negative savings rate just one year ago to a 5% savings rate today. This is a radical change in behavior in a very short time. We are paying off our debt at a record pace. We are working on transforming our household budgets from a position of vulnerability, living from paycheck to paycheck, to a position of long-term strength.

Our country's budget is no different from our family budget. And the United States' balance sheet is in the same disrepair. Yet, the politicians are doing the exact opposite of what the American people intuitively know is the right way to respond to this crisis. In a futile attempt to "save the economy", politicians are actually borrowing and spending even more. And the reason for this? To try and get the economy going again by getting the American people to stop saving, spend even more, and go into further debt!

Think of it this way, you owe $200,000 on your home that is worth $300,000. You have just paid off all your credit cards and you are able to make your monthly payment on your home while saving 5% a month. You go to your financial advisor to find out if there is anything else you could be doing and he tells you to go to the local BMW dealer, max out all three of your credit cards and buy a $60,000 5-series to get the economy going. He then tells you to pull out the $100,000 of equity in your home and buy a second home for $300,000 to help get the housing market going. He advises this knowing that the value of the home is dropping every month and there is an overcapacity of homes in your area so there is little chance you will be able to rent it out to help pay the monthly mortgage. He says the more important thing is that you are doing your part to help the economy.

Have you helped the economy? Not a chance. Here's why. You just went from having a healthy balance sheet to creating an extraordinary amount of debt. In fact, you are now upside down because your monthly payments on the credit cards and two houses is $4000 a month and you only take home $3,000 a month. So nine months later you now owe $80,000 on your credit cards and both your homes are in foreclosure. What is the inevitable result? You are forced into bankruptcy, you lose both homes, and you are now a negative drag on the economy because you cannot pay back the money you borrowed. You destroyed your entire net worth and you stopped spending money completely. You just made the economy worse.

This is exactly what our government is doing to "save the economy". Throwing as much debt as possible at the problem in the vain attempt to save it. The additional problem is that as the debt of the United States grows the interest rates we pay on that debt will also rise. That is because practically every country in the world is borrowing money right now, the countries that lend money like China will demand higher interest rates for their loans. If we refuse to pay the higher rates, they will lend their money to another country that is willing to do so. In other words, we will be forced to do it. So the United States will lose more and more money each month while the "monthly payment" for all this debt increases every month as the interest rate rises. You can imagine what the end game will be. Just like the household example above, we will eventually drive the United States of America into bankruptcy. And if we allow this to happen, this country will never be the same again.

As "Thomas Payne" says in the now famous You Tube video, your "none representing representatives passed the largest spending bill in American history without reading it and you did nothing. You say no to using your money to bail out failed, corrupt and greedy businesses (like AIG) and they ignore you. You look to government to solve problems they have created in the first place. Force your legislators to do what you now have to do, live within your means. If you don't you are committing national suicide. Throw out of office every congressman and woman who didn't bother to read the biggest spending bill in history before voting for it. Wake up America, you have allowed yourselves to become little more than cowering spectators, watching the nation your grandparents built, the richest most powerful, most self-sufficient Republic in history, with the highest standard of living any nation ever achieved, now in the middle of the greatest unprecedented decline in American History."

The opinion polls are clear.

We The People have said enough of the bailouts to greedy, corrupt companies that should have gone into bankruptcy. The politicians have ignored us.

We The People have said enough to the reckless spending in Washington. The politicians have ignored us.

We The People have said enough to increasing our country's debt a penny more. The politicians have ignored us.

We The People have said enough to the government that created Freddie Mac and Fannie May to allow corrupt banks to sell 50% of all their toxic mortgages to them, thereby using our money to drive the spiral of greed that led to the crisis. The politicians have ignored us.

We The People have said enough to the same government that "helped" the mortgage industry by creating Fannie and Freddie, now wants to "help" the health care industry by taking it over. The politicians have ignored us.

"We're mad as hell and we want our country back! Answer the call, get into the fight. It is a good time to be a patriot. The Second American Revolution has just begun."