Saturday, July 9, 2011

The Humbling of America

I’ve been watching Fox News and CNN and have read the mainstream online news media for a good decade. Even back in the high school years I would watch these channels as I was always interested in politics, especially foreign affairs. As the economy began to weaken I shifted my focus from politics to economics and markets. There a new love affair began as I learned how to trade and became somewhat successful at it. What I’ve noticed, especially from a first generation Greek perspective, is the humbling on the presentation and image of America. The Bush years were especially bad with the pundits pounding their chests and bragging how the military was beating the crap out of lightly armed insurgents in Iraq and Afghanistan. Some classic statements from the Bush Administration concerning the occupation of Iraq such as “bring it on” or “dead enders, losers, regime elements.” Then there was Cheney with his “deficits don’t matter” statement, one which will remain in infamy as the country begins to falter under its incredible deficits.

Growing up in Southern California I lived firsthand through the housing mania. And let me tell you that those who were infected with the mania truly went mad. I saw numerous people leave decent respectable careers to become real estate brokers and get into the “loan” business. I saw these people upgrading from Honda Accords to S Class Mercedes Benz. Oh the arrogance that was floating in the air. Watching the Ford Expeditions cruise down the street with the 25 inch rims and the TV’s behind each head rest, with the $2,000.00 sound system blasting. One of my good friends began his career selling car stereo products such as amps and subwoofers, and let me tell you that business was booming. Of course, most of the purchases were made on credit. I wonder how many of these cars were repossessed by the banks.

Our beloved housing industry has crashed and has nowhere to go but down as prices in many areas are still in bubble territory. For a detailed look at Culver City, check out this excellent article from Dr. Housing Bubble:

This is a perfect example of a city in a major bubble. Take a look at the sales history for the home that is selling:

The place sold for $370,000 back in 2001. Keep in mind that over this decade household incomes have gone stagnant. So what justification is there for this home appreciating nearly $600,000 in 10 years?

http://www.doctorhousingbubble.com/american-dream-only-a-dream-for-many-rent-versus-buying-a-home-analysis-in-culver-city-no-talk-of-household-incomes/

I fully expect housing values to retrace back to 1997 to 1999 levels as incomes are flat and in real terms have probably fallen. Throw in $4 gasoline and a shitty job market and there is no reason why housing values can’t fall to these levels.

America was also humbled when two out of three of its largest auto manufacturers went bankrupt in 2009. General Motors, the oldest and largest auto maker in the country was forced to file for chapter 11 bankruptcy and absent a taxpayer bailout would have gone into chapter 7 liquidation. Surely you all know the saying, “as goes GM so goes the country.” For the time being auto sales languish at 11 million units annualized whereas pre-crisis levels had sales close to 17 million units annualized. A good 33% reduction in auto sales nationwide partially explains why things are so damn difficult.

The next portion of America that will be humbled is its vaulted education system. A growing number of mainstream articles are pointing out whether college is worth six figures in tuition, fees, books and housing costs. Awareness of the Law School Scam grows by the week and other graduate programs continue to be exposed as complex frauds designed to enrich the education industrial complex at the expense of naïve borrowers. Imagine that, highly esteemed American “law schools” now being referred to as third tier toilets. In the next few years, expect to see many educational institutions to be humbled and shamed as law suits fly and the public finally begins to scorn the idea of sending their kids to these overpriced diploma mills. Whereas before it was practically sacrosanct that an education was a path to success, now it is slowly being discovered as just one of many frauds taking place in the country.

Finally we turn to the most pressing issue facing the country: the debt crisis. I listen to the pundits utter the words “debt crisis” and “America” in the same sentence with awe. The same pundits that spoke of America as the greatest and most powerful country in the history of the world just a few years ago are now comparing us with bankrupt deadbeat Greece on a regular basis. Just right now I heard some Republican governor say that “we will have our Greek moment in a few years.” Obviously the national discussion has turned to the debt crisis because the debt ceiling has remained stuck at $14.3 trillion and if it isn’t raised by August 2nd Mr. Geithner won’t have enough money to pay the bills and will lead to a default event.

Wall Street sits back and laughs at this “non event” as they see this as Kabuki Theater and politics as usual with the parties trying to gain political points with this game of chicken. While I mostly agree with Wall Street’s assessment of the standoff, there is a bigger story coming out of this debate, the story being that the country is rapidly becoming insolvent. I fully expect the ceiling to be raised whether it happens next week or in early August. But what we should take home from this standoff is the recognition that many beliefs that we held in the past will not hold true in the future. For example, the discussion of Medicare and Social Security cuts being on the table were unthinkable just a few years ago. The $14.3 trillion debt level was a stickler to move as most other debt ceiling raises happened with ease in the past. Poor Timmy G was forced to raid federal retirement accounts just to keep the ponzi going. If this debt ceiling debate was so fierce and deadlocked, just imagine how much more difficult the next one will be. Assuming Congress raises the ceiling to $16.5 trillion, we will reach that level by the end of 2012. What a joke. More importantly, what happens then? How fierce will the debate be then as our debt will be larger than the economy? Also, interest rates, which have remained at 60 year lows, are always at risk of jumping higher. Even a normalization of interest rates would wipe out the “$4 trillion in cuts over the next decade” that Congress is debating now.

For shits and giggles, here is President Obama’s budget forecast. This is pure comedy.

2011 2012 2013 2014 2015 2016
Receipts 2.174 2.627 3.003 3.333 3.583 3.819

Outlays 3.819 3.729 3.771 3.977 4.190 4.468
Deficit 1.645 1.101 768 645 607 649

GDP 15.080 15.813 16.752 17.782 18.804 19.791

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/tables.pdf

The above numbers indicate trillions. Per the White House, tax revenues are going to jump $453 billion next year and $829 billion from fiscal 2011 to 2013. Keep dreaming guys. The GDP numbers are even more comical as they project near $1 trillion dollar increases in economic growth in the years to come. Too bad that the last two months of job “increases” of 25k for May and 18k for June do not portend well for federal tax revenues. Bottom line, I fully expect this “forecast” to miss terribly to the downside with trillion dollar deficits to come year after year. Eventually, the national discussion will turn to austerity which will equate to hardship for millions of boomer Americans that failed to save throughout the duration of their peak earning years. For those of us in our 20’s and even 30’s, at least we will be given a grave demonstration of what happens when there is a failure to save. Take home message: save save save!

America threw itself a debt binged party over the last 20 years. As international competition increased and signs of economic weakness appeared, we covered up the cuts with the band-aid of debt. Now we have reached the point where debt no longer does its magic by creating wealth. This phenomenon is known as debt saturation. In addition, we have a wildly corrupt ruling class whereby a disproportionate percentage of income flows to the top 1% while many at the bottom languish.

I am beginning to see some positive signs out of all of this mess as Americans war tolerance has plummeted. Troop levels in Iraq remain at 50,000 and their departure is coming sooner rather than later. In addition, the public has completely soured on the war in Afghanistan and even Obama has gotten the message as troop withdrawals will begin in September. Woohoo! Also, it appears that the Greek situation has scared the crap out of many of our leaders as the reference continues to come up on a regular basis. Apparently, watching the police battle protesters with tear gas and rocks has given them the willies. And it should because a bankrupt country will have many angry citizens to deal with. Just yesterday while speaking with opposing counsel I told him that eventually there will be cuts to Social Security and Medicare as the math simply doesn’t support the expenditures. His eyes literally lit up in rage as he yelled ‘that’s so fucking unfair, it’s wrong, we paid into it!” And mind you this is a relatively wealthy partner of a small defense firm. If this guy got pissed imagine how angry all the poor saps that will be depending on Social Security as the primary source of income. As many of you know the excess revenues of Social Security taxes were spent leaving SS beneficiaries owning “nonmarketable” treasuries. This is what happens when government “saves” for its own people.

On balance, however we are still fortunate to live in a first world country as there are many places in the world that suck to live in. Whether it’s Pakistan, Indonesia, India, Egypt, Mexico, Iran, most of Africa, or many of the South American basket cases, there are just so many places that are truly fucked up. As difficult as things are and as difficult as things will become, at least we don’t have to worry about Malaria or Cholera outbreaks or even militias gunning people down in the streets. Look how quickly Libya and Syria descended into widespread violence. Basically, we still have many things to be thankful for as we were fortunate enough to be born into a first world country.

In the end, perhaps America needed a good humbling as our arrogance lead to our current predicament. Although it is probably temporary due to the debt ceiling debate, it feels good to hear the pundits and politicians actually discussing things of real importance as opposed to the culture wars which generally dominate the headline news stations. As our nation’s descent into fiscal hell continues in the next few years, it will be interesting to see if our leaders learn from the pain that is taking place from our European buddies across the pond.

Until next time.

18 comments:

  1. USA...USA...USA...USA.

    Don't you just love the assholes that chant this nowadays?

    It's funny how the government and mass media use terms like "austerity" as a euphemism for basically printing money and devaluing your hard earned savings in the process.

    This country is going to hell. It will get worse before it get's better. But let's be honest, there is absolutely NO WAY that the government is going to be able to pay back $14.3 trillion without implementing hyperinflation. They've run out of cute gimmicks and political pandering. They can't fudge the interest rates any longer, they're at 0%. We had the tech bubble, the housing bubble, the education bubble, the commodities bubble, etc. We all know the end result, or what "will" be the end result.

    The consumer is tapped out. The only way the economy will improve is if people have money to invest, i.e., disposable income, to start business, expand businesses, invest in current businesses, etc. My generation (Gen-X) is tapped out on student loans. Many of us can't afford the basic necessities of life that our parents took basically treated as a given. As for myself, I've learned the hard way what compound interest means. I don't intend to go into debt again after I pay off my student loans. The government can't force me to take out more and more loans that I'll be a "hope'in and a wish'in" that it will all pay off in the end. The only people getting rich off the education scam are (i) the schools, (ii) professors, (iii) the government and (iv) banks. I'm looking forward to a new paradigm shift in this country. In my view, secession is the only way to go and I see it an an inevitability.

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  2. A good start to resolving the debt crisis is to dissolve the Federal Reserve. Cancel the debt owed to the Federal Reserve will save a couple of trillion. If an Act of Congress could create the privately run Federal Reserve, an Act of Congress could end it. Then again, the folks that run the Federal Reserve have Obama in their pocket and he won't sign such a bill if it ever came to his desk.

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  3. SJD,

    I'm reading Aftershock by Robert Reich right now. While it's a remarkable diagnosis of how we got to this point it's a little light on proscriptive measures. I was wondering if you had read it and whether you had read any books by like-minded academics who do discuss that many of America's problems are systemic and might have some solutions.

    -Andy

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  4. We need the fed. The economy is too complex and too intertwined to not have some kind of institution making day-to-day decisions.

    I am glad that NYT finally reported on the FDIC struggle against Treasury and Fed chairman during the darkest hours of the credit crisis. The sad part is Obama continues to listen to people like Timmy and Larry summers (the worst human being next to robert rubin and alan greenspan) when he should be listening to the Brooksley Bornes' and Elizabeth Warrens' of the Washington policy wonks. There were warnings for YEARS, almost a decade before this collapse happened! Its rather sad because I think Obama's heart is in the right place. He is just a ineffective puppet. We'll be saying "carter" in 2012.

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  5. This is perhaps the best post on the subject of the decline of America I've read on a blog so far because it speaks to the unique pain of our generation (those in our 20s and early 30s) who should be flourishing but are instead faced with the sad fact that we must put our lives on hold, either due to crushing debt and/or a poor job market. This pain has largely gone unnoticed in both Washington and in the mainstream media for the reasons you so articulately detail (the scam of higher ed being the most striking). I also love how you said, basically, that the old wisdom just doesn't work anymore. Our parents never prepared us for this. No one was prepared.

    But I must mention one other very important factor you neglected to mention that is killing us: our health care system and, for young people in particular, psychiatry. I mention psychiatry because a larger and larger swath of youth are being scooped into the mental illness bin due to the broadening of diagnostic criteria and rampant corruption of pharmaceutical companies. From 1995 to 2003 alone, diagnoses of childhood bipolar disorder rose 40-FOLD. Some children as young as two are being put on potent antipsychotics for bipolar disorder based on the flimsiest of research which is largely biased by corrupted psychiatrists receiving pharmaceutical money totaling in the millions. In fact, the major player in the childhood bipolar field, Joseph Biederman, was recently disciplined by Mass General Hospital and Harvard for not disclosing his pharmaceutical payments. I can assure you I've done extensive research into the history of psychiatry in the last 30 years and believe me when I say this is the tip of the iceberg.

    These antipsychotic medications can cause devastating side effects such as diabetes and a permanent movement disorder known as tardive dyskinesia. Antipsychotic medication has also been shown to shrink the brain over time, although the significance of that finding hasn't been determined yet. Regardless, it is ominous when one considers young children are being prescribed these medications.

    This rampant and reckless drugging of our children and teens will have a massive sociological and economic impact on our country in the coming decades. It has already been noted in Robert Whitaker's "Anatomy of an Epidemic" that long-term medicating of psych patients can cause worse long-term outcomes compared to those who weren't medicated. This fact, he argues, is represented in the disability rates, which have also skyrocketed since the introduction of the new generation of psych meds. He essentially asks, "if these new meds are so effective, why have mental disability rates rose so dramatically?" The number of disabled mentally ill in the US has tripled over the past two decades, and 1,100 adults and children go on government mental disability DAILY.

    Indeed, some of the medication side effects are devastating and can prevent people from working and this is an obvious drain on an already eggshell-frail economy. It also must be said that the withdrawal symptoms from these meds can be debilitating (insomnia, rebound mania, depression and panic far worse than the original symptomology, etc) and can persist for years and, in some people, perhaps permanently (there are cases of people who have withdrawn from benzodiazepine medication like Xanax and Ativan and ten years later are still struggling with panic and cognitive decline and cannot work).

    And now for a little of my own prognosticating: If this generation "comes of age" on psych meds, I predict dire consequences for their employability, considering all the cognitive and social dysfunction long-term medicating can cause. And if a large sector of the work force can't work (or is underemployed) in an already weak economy, well, who knows what will happen, except that it won't be good.

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  6. Great post and I also agree with one of the comments, I will never go in debt again. I won't be buying a house, unless I can get it for cash, and that won't be possible in most areas. So eventually when I have enough money that I don't really have to work, I'll buy a house in cash in the middle of nowhere, then get on the government benefits programs if they still exist rather than rely on working again.

    I don't need all the consumer products that are being pushed. And if everyone thinks like me, there is no economy. Not that there is one anyway these days, since most people have no money.

    The farmers always seem to kill the golden goose. Our goose is already cooked. People act like a major power can't possibly contract and become a shell of what it once was, but before us the biggest empire was the British and they are now a worthless tiny island. That is our eventual outcome too. The only thing is whether we drag the rest of the world down with us first or not.

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  7. The pain must be felt on the top of the income ladder. There was a reason Social Security, Medicare and the beginnings of Johnson's Great Society were enacted in the 1930's: the alternative was another French revolution.
    "Five or six hundred [aristocratic] heads lopped off would have assured you repose and happiness; a false humanity has restrained your arm and suspended your blows; it will cost the lives of millions of your brothers. Jean-Paul Marat, L'Ami du peuple

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  8. Dr. Pharma (the writer of the long pharma post lol):

    Great comment. I have discussed this issue before and it amazes me how parents throw their own children under the bus with all these fucking magic pills. I will look up the data but if you know some of the important rates please let us know.

    Gribble: fuck debt, I owe $100 on my credit card and simply keep it open as a safety measure. I too reject the notion of financing things, whether it be a car or a house, unless I can one day pick up some bank repo that needs repair for 80k.

    Andy: haven't read aftershock but I am familiar with Mr. Reich. The only prescriptions that I understand that could heal our battered economy is mass liquidation of debt across the board. Remember that debt is simply a promise to pay. There will be many broken promises in the years ahead.

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  9. Time to collapse this economy and rebuild it from scratch. I say, stop participating in the system that is rigged against us, engage in Debtors' Revolt / Default-en-masse, and achieve the collapse that is unfortunately the only way to reset the system.

    Current levels of income inequality ensure that the French Revolution is coming to America. There's no way I see to avoid this result, if the system keeps on as it is. I wish more people would see the dire straights we are in, and stop thinking that there's a political solution. Our democracy is dead, rendered into an oligarchy.

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  10. @ anon at 3:44pm

    You are probably the poster JRD. Hope you had a nice weekend.

    Debtors revolt will eventually happen, but I think its a bit premature to actively and purposefully default on student loans. Letting go of a mortgage is good economics so millions have elected to do so. Student loans, as you well know, permit the gov to garnish your wages and jack up the principal to triple the original loan amount. Thus, the consequences are much more severe. In addition, those that have the ability to pay are paying out of fear of the consequences of default. This fear will keep repayment rates higher for the foreseeable future.

    Another huge factor is the widespread ignorance and partial acceptance of the current corrupt and rotting status quo. Just like the matrix, too many don't want to take the red pill. It's simply human nature. Just like the Greeks that were chilling drinking their coffee in ignorance found themselves protesting in front of Parliament when the gig was up. When its gone its gone. People are reactive, not proactive. Once they can no longer pay the bills and put food on the table, they will start screaming off with their fucking heads. However, there is a small percentage of people that see these things in advance and have a enlightened understanding of the matter. These are the ones that could become leaders. The people want to be lead.

    I still see time ahead, the powers that be are tremendously adept at kicking the motherfucking can down the motherfucking road. But eventually we will run out of road. And that's when the real fun begins.

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  11. The Bigger the Bubble...
    The Better the Rubble...

    The Bigger the Banker's Lie
    The Sweeter the Banker's Pie...

    "Geithner says will be some time before many people feel like the country is recovering."

    Geithner tells NBC’s “Meet the Press” that it’s a very tough economy. He says that for a lot of people “it’s going to feel very hard, harder than anything they’ve experienced in their lifetime now, for a long time to come.”

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  12. Subprime,

    Great post as usual. The only thing I will disagree with you here is that housing prices will continue to fall a long way.

    In addition to the many bubbles that we're in right now, we're also in the midst of a treasury bubble. In the end, the rich will need to find something else to throw their $ at. That thing might well be real estate. I don't know what part of socal you live in, but I see many rich Asian immigrants in both LA (San Gabriel Valley) and San Jose (Cupertino area) snagging up one house after another via cash only purchases. Eventually, this will drive housing prices up once inflation goes into full throttle.

    In my block alone, I have seen a huge influx of Chinese and other investment groups snagging real estate for pennies on the dollar and renting out half a block.

    Regardless, this trend is only expected to accelerate and it'll only reinforce the paradigm of the growing wealth disparity gap.

    Cheers,

    RZ

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  13. Hey Subprime,

    So Cal local here as well (La Canada actually). You are right, the insanity that was reached between 2003-2008 was mind boggling. I do not see any quick, or some what painless remedy to this situation. Continually reading about Wilhemian Germany (1900-1918) just scares me. So many similarities between our two nations. Just waiting for when I need to take a truck load of our dollars down to the Vons to buy some coffee.

    More on this, Germany paid for it's war effort by printing more money, (quite similar to the Conferdacy, which is why you can still buy confederate dollars at such a low price in antique stores, there are some many still in circulation). All episodes in history where a nation has tried to spend it's way out of a crisis, well they do not end well. Great post subprime

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  14. Greece belly up...
    Obama's a chump...

    Italy on the ropes...
    Our leaders are dopes...

    Educated to be retards...
    The people ass-lards...

    The media shills in...
    Ain't it a Sin?!....


    "Did anyone really think that Italy would be able to get through this thing without needing a bailout? Just when you thought that things in Europe could get back to normal for a little while, here comes Italy. On Friday, there was a bit of a “mini-panic” as investors started dumping Italian financial assets. European officials are concerned that the sovereign debt crisis that has ravaged Greece, Ireland and Portugal will now put the Italian economy through the wringer. European Council President Herman Van Rompuy has called an emergency meeting for Monday morning. He is denying that the meeting is about Italy, but everyone knows that Italy is going to be discussed. European Central Bank President Jean-Claude Trichet and European Commission President Jose Manuel Barroso along with a host of other top officials will also be at this meeting. If it does turn out that Italy needs a bailout, it is going to change the entire game in Europe.

    What is going on in Italy right now is potentially far more serious than what has been going on in Greece. Italy is the fourth largest economy in the European Union. If Italy requires a bailout, the rest of Europe might not be able to handle it."

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  15. Great posts, but too much attention directed to Europe as though the US debt crisis is better-- we're far worse in terms of fed debt, state debt and private debt. While Greece is an egregious example, it's a tiny portion of the European economy. And while Italy is having its troubles, its private debt levels are far below those of the United States, not least b/c the Euros don't have a student-loan crisis as in the US!!

    Most of Europe is actually in a far better state than the US since they don't have student loans, and held on to their manufacturing and tech industries. Germany may have the world's most exemplary economy right now, and the Scandinavians are pretty strong too, even though they don't have coal or other goodies to dig up from the ground. They built their economy from their smarts. Undoubtedly they wouldn't be in great shape if the US were to go belly-up (major export market), but they'd hold together far better than we would. If the hopelessly corrupt US system continues as is without reform, it's probably far better to be in Europe than the other side of the pond.

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  16. There's not going to be any revolution, no hyperinflation either. If and when it becomes necessary to do so, the government will start taxing the accumulated credits owned by the wealthy. The wealthy themselves will insist on it. Better to allow a little to be taxed away than to have the whole house of cards come tumbling down.

    In other words, the oppressive regime could endure for decades. Oppressive regimes endured in Europe for hundreds of years. In particular, the British had an oppressive rentier dominated society right up until WWII, despite the trappings of democracy. Lots of talk of revolution in England during the course of the 19th and early 20th century (England was where Marx did his mature work, and where the socialist movement was born) but nothing ever came of it.

    What will happen is that we will have to import less oil, and export more food and coal to buy what we want from Asia. The result will be a much lower standard of living for many Americans, especially those whose lifestyle is based around cheap energy. But there will be no collapse.

    And no, the Europeans are not better off. America has some very vibrant and internationally competitive industries. Southern Europe is going to be absolutely crushed by Chinese imports in the next decade. Northern Spain and Italy especially, are major manufacturing centers, producing the sorts of medium-tech goods which the Chinese can easily compete against. Demographics is working against all of Europe, and they can't accept huge numbers of immigrants the way the US can. So when the labor surplus turns to labor shortage, which will happen later this decade, all of Europe, even Germany, is going to be facing a problem of how to pay off the retirees given a declining number of workers. Whereas the US can just open the floodgates to immigrants.

    As for gold and silver, I'm agnostic. The dollar will be falling against commodities, but gold and silver are not true commodities. In any case, much of the rise of commodities against the dollar has already been anticipated, and perhaps overly so. The best bet, as always, is human capital. Develop skills that will be in high demand 10 to 20 years from now. Certainly there will be demand for lawyers, always has been and always will be, but it won't be a road to riches for most people. But then most of you seem to have figured this out already.

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