I thought I would express today the reasons, both non-specific and specific, that I believe this country is in a recession and will stay in a recession for some time.
A recession is a decline in business activity over a period of time. Recessions have historically happened in this country a couple times every decade. During recessions there is less money spent and invested and more money put into savings accounts. Recessions may be times of lost jobs and general slowdown in how much we spend as citizens.
There are some people out there who say we’re in a recession right now. They point at the housing market and say “See! There, that proves it! Nobody is buying homes!” The important thing to remember about investment advisers and economists is that it pays to be pessimistic for them. If they project a gloomy future, nobody is upset if they are wrong. Conversely, if a manager of a mutual fund were to come out and say that the future looks bright, he will only keep his job if he’s right.
Don’t listen to these bozos. At least, not for the reasons they’ve come out with so far. Only the history books will be able to give us the true reasons for any recession or, heaven forbid, a depression. What I want to do is do my part to add to the doom by giving you my reasons – and I think they’re pretty good.
Back to the recession problem. The problem that we face is that people just aren’t spending enough. When I don’t shop and Lyn’s grocery store, Mr. Lyn has less money to spend. When he can’t spend that extra money to get the I-pod he always wanted, Mr. Jobs has less money. When Mr. Jobs has less money he can’t hire me to work for him.
The current management takes the stance of “Print more money,” and sends us a few hundred dollars to try to encourage spending. In the short run this makes sense, but once we’ve gone out and spent our tax refund, what then? The fact is that we are in the midst of a massive amount of government spending on military actions right now and yet somehow we still face an impending recession. Imagine what our situation would be like if we hadn’t gotten ourselves into a mid-east military miasma. The government is already pumping billions into the economy and yet it’s somehow not enough.
There are some underlying problems that need to be addressed. I believe that the problem is the increasing cost of things such as homes, cars, health care, and other ‘indispensable’ goods. The analysts point at the housing market as a symptom. I say it’s one of the underlying problems.
The real problem is that there are certain things out there which we call needs which we can’t afford not to purchase. These needs also have associated salespersons, producers, and various clingers-on. Let’s look at homes as an example.
I want a home. I have an income. My home cost can be expressed as a percentage of my annual income. Or my monthly payment can be expressed as a percentage of my monthly income. Traditionally (I mean going back 30 years or more) a home would cost no more than 3 times a household’s annual income. Similarly, the generally accepted advice even as recently as last year was to spend no more than 1/3 of your monthly income on housing. In the last 15 years or so, things have changed drastically.
According to the San-Francisco Gate newspaper, hardly anybody spends less than 50% of their monthly income on housing. Most people spend much more than that. How did this happen?
The price of homes rose much faster than income levels.
The efficient market hypothesis says that as demand increases (like when I want to buy my home) the price will go up a bit to match. The efficient market hypothesis makes no allowance for “sales” or “greed.”
Imagine selling a home. You built it for a certain cost, say 100,000 dollars. A few years later you want to sell it. Has the house changed? No. If anything, it’s developed defects and flaws. Yet rather than sell it for less you want to sell it for more. And not just an amount adjusted for inflation, either. A home bought for 100,000 dollars 5 years ago in the area where I live is now for sale for 235,000 dollars or more. Again, why is that so? Because people are greedy.
First the owner hopes to move up the ‘property ladder.’ He wants more than he paid for it. Second, the real estate agent wants more and has an incentive to sell the home for the maximum amount possible. Third, real estate developers who purchase and inflate the cost of homes for a profit.
People need homes. Human beings require shelter. We buyers, therefore, cough up the dough – even if it is more than we had expected or hoped to pay. Even if the price of the home is more than the cost of the materials which form it. We can’t afford not to. The only possible outcome is the inflation of the cost of a depreciating item. (think about it: homes don’t stay valuable forever. They are about the only “investment” which increases in price year after year till suddenly becoming worthless when the property is judged as condemned.) Some possible outcomes to this scenario include either the beginning of government regulation on home prices, or the formation of an elite property owning class who charges the lower classes rent (only slightly lower than the cost of owning) and thereby prevents the lower classes from ever owning property.
As long as people are “selling” what we humans need, there will be the potential for drastic inflation and drastic recession.
Think about it. We all need health insurance, yet it’s becoming more and more unaffordable. Why? Because there are people who make a living selling it. Because there are companies getting richer and richer providing it. Because there are lawsuits that justify the health care provider in charging more and more. It has become so expensive to insure employees here in the united states that some companies are paying to fly sick employees to other countries such as India where they receive world-class treatment and stay in 5 star hotels during recovery – and it’s cheaper to the company than the health insurance premiums. I discovered for myself that it’s cheaper to fly to Taiwan to have my dental work done there (even without the government insurance!) than to pay for it here.
As I remember the story, one day an analyst came to Henry Ford and told him that he was doing great, that his business was great, and that he would be out of business within a year. The reason was simple: His cars cost something like 600 dollars which was basically the average American’s annual wage. The people who could afford cars had bought them and there were only a few people left to sell to. Henry went away for a couple of days and when he came back he did something incredible: He increased his employees wages by 600 dollars per year, to be applied 1 year retroactively if they would accept payment in the form of a new car. Naturally, every Ford employee became the new owner of a new car. His decision rocked the world. No other car company, manufacturer, engineering company, or any related firm could compete with the wages he offered. Wages around the nation went up and cars became a necessity for all Americans rather than a luxury for the rich.
Today, perhaps because of strong competition, car prices are not rising as sharply as home or health care prices, but remain a massive strain on the average household’s income.
Education inflates at about 7% per year, meaning the cost doubles about every 10 years. Income inflates at about 3% per year on average. If nothing changes, we’ll either have an elite, educated class who can afford education, or the creation of a debt class – a generation who starts out their financial lives with enormous debt payments.
Back to our current situation: the recession. How can the average American afford to invest, spend, or otherwise help stimulate the economy when the cost of our ‘needs’ has grown to consume our entire income? We can’t.
If nothing changes this mini-recession will become worse and worse. Classes will become divided more and more till there is no more middle-class, just an upper and a working class. We’re seeing it happen before our very eyes. Unchecked, the recession will grow into a full-blown depression. In the wake of a depression I would not be surprised to see as harsh controls placed on real estate, health care, and the like as there currently exists in the investments world.
The big question, then, is how do we make the change? And will we do it before it’s too late?
I’m afraid I’m not smart enough to know for sure, but it looks to me like it’s either going to be the whole nation suddenly becoming more selfless and less greedy, or it’s going to be the government stepping in more and more.
As much as we fight and hate things like nationalized health care in this semi-free-market economy, it may be the only solution that we can find. Our only other realistic hope is the creation of businesses which drastically undercut their competition and somehow avoid the trap of inflation (or at least postpone it for another few decades). Realistically, this kind of business doesn’t come into existence until after a depression.
Scary to some, but it makes sense to me. The math is simple. Products with prices that inflate faster than income will eventually be out of reach. If those products are needs then we’ll soon find out just how badly we really need them.