Shut up, Happy

Posted by Bill Hoyt February 22, 2009 at 1:51 p.m.

Standard and Poor's warns we've only just begun:

SAN FRANCISCO (MarketWatch) -- The credit crunch may only be in its early stages and a bigger contraction in lending in coming months could have "serious implications" for the U.S. economy, Standard & Poor's Rating Services said Friday.

While politicians and others have complained that banks aren't lending, the data on outstanding credit in the U.S. only tenuously supports this idea, the rating agency said.

"What's behind the apparent difference between perception and reality?" Standard & Poor's credit analyst Tanya Azarchs said. "It may be that, while growth in overall credit was positive through at least third-quarter 2008, it has risen at a slower pace than at any time since 1945 -- far below the 8%-10% rate in most years."

Reading the third paragraph in conjunction with the first is enough to give one Orwellian fits(1); one cannot possibly have a "bigger contraction in lending" when lending has not yet contracted. That's like reducing your debt by refinancing your house to pay your credit cards and taking a vacation to Tahoe on all the money you will save in the future(2).

Assuming that credit is still expanding, then we are still doing nothing to deal with the underlying cause of our financial troubles: that people already have more debt than their incomes can support. Put into that light, one can see easily the absolute insanity of credit needing to grow at an 8-10% rate, year after year. Are there 8-10% more Americans each year? Of course not. Therefore each existing American is expected to take on 8 or 10% more debt every year in order to keep our economy healthy(3).

Perhaps that is why S&P is right for the wrong reasons. Americans cannot take on more debt, therefore they will take on less. When "the numbers" start to show an actual decrease in debt vis-a-vis incomes - and when our cultural expectations reflect an abhorrence of debt equal to our late love of it - then we will be ripe for a generation-long recovery.

In the meantime, I expect we shall see our waves of "contraction" and market panic, currently coming at quarterly iterations, becoming worse and worse and closer and closer, until the market our government is fighting so hard finally reduces our debt burden - our demand on future production - to a reasonable and manageable level.

I'm reminded of the words of Paul, given in another context: "When they say, 'There is peace and safety,' then sudden destruction will come on them, like labor pains on a pregnant woman; and they will not escape it." At least not until they can pay their bills without going further into hock to do so.

(1) Or to qualify one as an Obama budget whiz, assuming one has paid his taxes.

(2) still, it comes as no surprise to discover that something taken as axiomatic in Washington is only "tenuously" supported by facts.

(3) And they are expected to pay interest to their bankers on that amount, of course.

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ladylaw (Terry Bush) says…

We (as individuals and a country) got into this mess because "People (and businesses) (and the goverment) already have more debt than their incomes can support...."

So the answer our government leaders came up with was/is to take on even more debt?

Now I am not a genius or an ecomonics major, and maybe I am missing some information.
But what kind of logic leads anyone to conclude that the way to get out of debt is to spend even more money you do not have?

I understand some of the reasoning - we don't want to see important institutions fail; that would bring us even further down.

But aren't we just putting off the eventual demise of anything (person, business or government) if we keep spending money we do not have, and borrowing from the future, China and other places/persons?

Some day, all too soon, the people (and places) owed that money will want to be paid back.

Better to bite the bullet and suffer the consequence now then to owe even more later.
February 22, 2009 at 2:31 p.m.
alm77 (anonymous) says…

Why is your format non existent? Understanding your blogs is difficult enough for my pea-brain. I can hardly read this.

I don't know about you, but everyone I talked to who is getting a tax refund this year is using it to pay off debt. I've also heard of several who are cutting back on expenses and putting money in savings in case of a job loss. Maybe we're more "ripe" than you think.

What do you think of Obama's plan to reduce the deficit? (and talk to me about what is a deficit because I seem to recall the deficit is one thing, and the national debt another...)
February 22, 2009 at 5:40 p.m.
DOTDOT (anonymous) says…

Heh. I'll be using my Federal refund to pay my State taxes.

Poof.

ALM:
Try here. www.elborak.com
February 22, 2009 at 8:22 p.m.
El_Borak (Bill Hoyt) says…

Egads! Sorry, ALM, it looked fine when I published it. Someone appears to have carried off all of the carriage returns.

"Maybe we're more 'ripe' than you think."

Oh, I agree. The American people may be stupid, but they aren't stupid: they collectively elect a government that works against their interests, but I think that they, as individuals, deep in their guts, understand that we simply can't borrow our way rich, and I expect they will make the requisite adjustments. Savings is going to go through the roof, over the kicking and screaming of the Fed, the Treasury department, and the alphabet soup of agencies designed to keep us spending. I pray that they fail to destroy the dollar in their mad dash to stimulate all of us.

LadyLaw: "what kind of logic leads anyone to conclude that the way to get out of debt is to spend even more money you do not have?"

One simply needs to ignore debt. The reason Dems and Republicans talk past one another so often is not that one side is stupid and the other not*, but because they do not share certain assumptions that allow for discourse. It's the same in economics. Our financial system is run by people for whom economic activity, as measured by GDP, is king. Nothing else matters, or matters comparatively little. In order to keep GDP expanding all the stops - including more borrowing from the future to stimulate measurable activity today - are pulled.

But step out side the theory and one discovers that some stops cannot be pulled. It's ok, we have outlived many theories in the past, and we will outlive Keynes, so long as the American people have the good sense to ignore him and his disciples.

* Though that's exactly what each side will tell you
February 22, 2009 at 8:57 p.m.
El_Borak (Bill Hoyt) says…

ALM: "(and talk to me about what is a deficit because I seem to recall the deficit is one thing, and the national debt another...)"

In short, the deficit is the year to year difference between what the gov't takes in and what it spends and the debt is the accumulation of all deficits from day 1. You can simulate the same thing in your personal finances by comparing your personal "bottom line" for two consecutive years. Your "debt" is the total balance, your "deficit" is the change from one year to the next. If you are further in debt (i.e. poorer) this year than last, you ran a deficit. Every year our government runs a deficit, it is poorer than the year before.

I think of Obama's plan exactly what I thought of Bush's: no president knows year to year what he will face, so plans may or may not reflect reality. However, as I note the amount that he plans to cut the deficit to ($533b) would still be larger than that of any single year in our history but the current one, I am less than encouraged, to say the least.
February 22, 2009 at 9:16 p.m.
alm77 (anonymous) says…

That's what I thought. So, he's saying "Hey, we're doing better than Bush." which isn't saying much.... ;)

Oh, and your blog makes me smile. Thanks for the reminder that it's out there, dots.
February 23, 2009 at 9:39 a.m.
MyName (anonymous) says…

The thing that people aren't grasping is that this is exactly like every other economic bubble. If you look at the dot com bubble, it came about partly because companies built network capacity at an expected growth rate and none of them stopped to think about overall capacity. Eventually, you are going to reach the point where everyone has all the bandwidth they can use and then you can't grow at a rate where you're doubling every 8-10 years.

It's the same way with lending: at some point, everyone is going to have every credit card/mortgage/car payment that they want or can afford. But the industry overbuilt and kept trying to sustain an unsustainable growth rate. The difference is that if the banks fail, you have bigger problems than if Worldcom fails.

As far as the government debt goes, it all depends on whether the Federal government ends up adding new services at such a high rate that it ends up in a California type budget mess, or if this is a temporary blip and we start to dig our way out of it. The only "good" news is that investors and institutions are so skittish about giving their money to anyone that the U.S. is still able to finance its deficit at a very reasonable rate as it's viewed as one of the safe bets.
February 23, 2009 at 12:15 p.m.
El_Borak (Bill Hoyt) says…

"The difference is that if the banks fail, you have bigger problems than if Worldcom fails."

Much bigger. And as they are demonstrating every day, it's difficult to impossible to get any system to downsize itself in any rational manner. They are like bacteria in a petri dish, growing and consuming until there is nothing left to consume but one another, then the entire colony collapses.

We have too many banks with too many loans out, yet the Fed and their captive politicians are screaming at the banks to get them to lend more even while they pour taxpayer money into them to cover the bad loans from before. They are trying to prop up house prices while simultaneously trying to reduce principal on the loans on their houses, while subsidizing the rates on those loans, while guaranteeing those loans and offering tax credits on them, all to help the borrower who is also the taxpayer who has to pay for it all.

This is what madness looks like. We have barely begun to see what panic resembles.
February 23, 2009 at 1:39 p.m.
ladylaw (Terry Bush) says…

As gloomy as it sounds, I don't see any way out of this economic mess other then to have a few hundred (maybe thousand) companies collapse (even the biggies) and a few million (or ten) people go unemployed for several years. Think the "great" Depression times 10. It will not be fun or pleasant. But it can be survived. By the majority of people. We have to pull together and stop whining. It might help to figure out how this happened, if only to prevent it from happening again. But right now, we need to work on getting back on track. I believe we can do it, as individuals and as a country. But only IF we are willing to work really hard, cut back on a lot of things that are not necessities, and perhaps not live as long as our predecessors (manual labor will wear a body out a lot faster, especially if there is no money for doctors). The one thing I am not sure we can do is save this country, at least in part, so it looks like it once did. I hope we can do that. I just don't know if the countries that own our debt are going to cooperate and let us come out of this nightmare with anything like a democracy. That will be up to our leaders. Do they want to turn us into a more socialistic country, where the government owns and runs most businesses. Do they want to borrow even more, from the future and from other countries? Or do they want to let the economy and market self-adjust, eventually righting itself, so that the survivors of this 2nd depression are once again free to try anything, and some even become millionaires etc. Only time will tell.
February 23, 2009 at 4:19 p.m.
alm77 (anonymous) says…

MyName, I think it was compounded by the literal overbuilding as well. Too many houses, complexes, etc. On the other hand, that may be the saving grace as it provides affordable housing. I dunno.

One reason I love Dave Ramsey so much is because he tells people to stop worrying about *the* economy and start worrying about *their own* economy (personal, household balance sheet). Because that advice works in any economy.
February 23, 2009 at 4:37 p.m.
El_Borak (Bill Hoyt) says…

"On the other hand, that may be the saving grace as it provides affordable housing. I dunno."

It could, and what could be a saving grace is being turned into an albatross. On the one hand, Congress spends hundreds of billions to provide "affordable housing," on the other, they spend hundreds of billions attempting to keep home prices from falling to an affordable level. If they would just stay out of the way and let housing prices fall - and yes, my house would be affected like everyone else's - housing would become more affordable. It's maddening.

People ask me why I'm so pessimistic, so certain in proclaiming that stimulus, whether the GOP brand or the Dem brand, won't work. Well, there you have it. Congress is bad enough when they try to provide one or the other, as history shows that one can bet on at least one unforeseen side effect that will undermine it(1). When they try to accomplish mutually contradictory goals, there is simply no chance of it "working' no matter how much they spend(2).

(1) In the case of "affordable housing," by making high-priced housing easier to buy - Fannie will subsidize loans in excess of $3/4 million - they increased demand and drove up the price of houses, making them less affordable.

(2) Here's another unintended consequence: Dodd's last minute amendment to make it easier to pay back TARP money makes the capital non-permanent under accounting rules. It therefore reduces bank capital, making it even harder for them to lend: http://www.cnbc.com/id/29350327 That will not keep politicians from screaming at banks for not ending, however.
February 23, 2009 at 10:43 p.m.