How much more can the economy take?
Jun 28, 2009 at 2:15 PM Thread Starter Post #1 of 28

Happy Camper

Headphoneus Supremus
Oct 27, 2006
STL area
I started a thread a couple of years ago about the economy taking a hit and the mods removed it. Again last year I started a thread about the economy and it hadn't hit yet for most. Today I start another to see how it has affected your life.

I am a consultant/specialist in the healthcare construction industry and have been in my own business for 10 years. My work has gone from a high of $320k in 2002 to $170k last year. This year will most likely put me out of business.

I have always seen the cyclical nature of the economy in my 30 years in the business but this time fall continues. Until the govt. determines what it will do with healthcare, hospitals have stopped spending on non-critical services. Combined with the increasing inability of customers to afford healthcare and defaulting on what they do owe, it is becoming obvious that the nature of this downturn is not a normal cyclical adjustment.

I will continue to do what I have done because that's all I know. I hope it corrects soon but I believe there are other dynamics impacting the world economy the don't want to see it. The US economy has driven the world economy but I see it loosing strength.

To those who have a better handle on the outlook of the economy, what do you see as the state of the crisis and any solutions? The credit bailout will not help as we can't take on any more debt. The money that was put into the financial markets are being wasted by them and not getting to the people that need help. Debt forgiveness is not being given as an option even though that will be the only thing that will allow the economy to start spending again.

This topic is intended to be about economics and it's impact on our community, not politics, so please keep it to economics.
Jun 28, 2009 at 4:00 PM Post #2 of 28

Originally Posted by Happy Camper /img/forum/go_quote.gif
This topic is intended to be about economics and it's impact on our community, not politics, so please keep it to economics.

In today's world, economics is so inextricably intertwined with politics, the competition between nations for resourses, etc, etc, etc, not even to mention the machinations of various power-hungry organizations which stay mostly in the background, that it is nearly impossible to discuss in isolation. There are just too many elephants in the room. However, I will venture to say that the economy has not nearly hit bottom yet. Here in Kansas City, I see businesses closing up all the time, and surmise that commercial real estate is going to be taking a big hit. Further, the sub-prime crisis is over, but there are many, many more home loans out there that are going to be going bad.

Debt forgiveness is the only solution which will work, but creditors will demand every last cent, as always. Greed got us here, and will make the consequences last longer.

If I say what I really want to say, I might get banned.
Jun 28, 2009 at 4:12 PM Post #3 of 28
The current crisis is unprecedented, therefore there's no real accurate barometer for when it will rebound. It combines parts of the great depression of 1873, which most people haven't read about, with many other unique factors. Credit card debt, a massive housing bubble, little-no savings rate, over-extended credit for things like cars and material goods, all add up to a powder keg with a fuse of unknown length. It will explode at some point in the future, but no one knows when.

Nothing the gov't of any country can do will have anything but a negative impact on what's going on. The sheer numbers of what we're talking about is so much larger than the world's GDP that it isn't funny. Just the amount of private real estate loans is more than $30 trillion dollars. Commercial real estate has to come close to that figure. So, when someone says they'll throw $500 billion at the problem that paltry amount of money is lost nearly every month with no end in sight. Each time our leaders tell us they finally have a handle on how bad things "can" get it gets worse. It started out "contained" in sub-prime mortgages. It then spilled over into credit card debt, car loans, commercial real estate, prime mortgages, and more. Sadly, the Alt-A crisis is just starting, and is going to get pretty bad for another 2-3 years on that front alone. Who knows what other areas of our economy will be effected next. How far reaching can this become as it gains momentum and speed?

Ah, I could rant for hours about this current debacle and how it's being handled worldwide. As someone who doesn't own a home, never owned a home, and will be footing the bill for those who helped cause this crisis it's quite an understatement to say it's frustrating to watch what's going on in our world today.
Jun 28, 2009 at 4:15 PM Post #4 of 28
I know you said no politics, so I will do my best, because from my point of view, it's very hard to disconnect them, as they indeed affect one another.

I see this is a cooling down period for the economy, and it's only natural. There are several factors that led to this, all of which are interconnected.

First, for years, people were buying up real estate, and seeing constant increases in home values, which caused yet more buying. However, when the rates reset higher, many people couldn't pay the rates, and thus the number of houses on the market skyrocketed. This caused the collapse in the real estate market.

At the same time this was happening, Fannie Mae and Freddie Mac were buying up these loans, many of them sub-prime, and selling some of them to other banks as well. When the homeowners started defaulting like there's no tomorrow, the value of these loan packages plummeted. Unfortunately, Fannie and Freddie, as well as other banks, owned a significant number of these loans, and therefore were greatly affected.

Then you have the dreadful "credit-default swaps." To explain simply, imagine Person A owns a house in California, and he buys fire insurance to protect it. Now, if the house burns to the ground, Person A gets compensated. What was happening was that not only Person A, but People B, C, D, and E also purchased fire insurance on Person A's home. This was a serious risk for the insurance company. They were counting on the home not burning down. That way they could keep everyone's premium. Now, imagine that instead, People B, C, D, and E bought insurance should Person A default on his/her house. As "Person A" started defaulting all around the country, insurance companies had to pay out to People A, B, C, D, and E. Obviously, they didn't have enough money. This is what caused AIG and the likes to fail.

As all of this started panning out, the destruction of the real estate market affected a significant number of people. They had less money to spend, because their rate was reset, and as I said earlier some people just had to file for foreclosure. As you probably know, consumer spending accounts for upwards of 70% of our GDP. This means that a change in consumer spending can be amplified due to our dependence on it for constant economic growth. As people started spending less, companies had to respond by make layoffs and cutting prices. As more and more companies did this, it compounded the problem and even more people defaulted.

I hope this sort of makes sense to you
Jun 28, 2009 at 4:17 PM Post #5 of 28
We won't get out of the woods until real estate prices reset. I can't get into this without touching on politics, but the various governments (state and fed) have been doing everything they can to keep prices from collapsing. California just put another 90 day moratorium on foreclosures, which helps for 90 days, but isn't going to do much in the long term. However, Sacramento is terrified about what a price reset would do to property tax revenues. They see the writing on the wall.

While the subprime mess is mostly over, we still have to go through resets of the commercial, Alt-A, Option ARM, and prime real estate markets. When prices fall in one segment, they'll suck down prices on others. Even if someone has a 30 year fixed, great credit and a solid job, if their house price goes from $500k to $200k, the obvious response is to walk away. The only people who won't be tempted to walk away are those who bought 10+ years ago and didn't use their false equity to buy a bunch of stuff. There are very, very few homeowners who fall into that category. Even the responsible ones who watched their "equity" climb into the stratosphere thought it OK to pull a little out to buy new cars and other stuff that kept the economy humming.

If you look at the entire market, subprime was only about 25% of it. That means we're only a quarter or a third into the mess. I don't think we'll see recovery until 2016 or 2017. A lot is going to change between now and then, too.

If anyone wants to forestall this collapse, the only way to do it is to let real estate prices fall to market. The best way to handle that would be to modify the bankruptcy laws to allow principal to be marked down. That would fix it.

It won't happen for obvious reasons, so the market will unwind itself with unexpected blowouts and collapses where the system backs itself into a corner trying to prevent some other collapse. The next few years will be interesting, to say the least. This will be a very different country by the time it's over.
Jun 28, 2009 at 5:59 PM Post #8 of 28
Glad I paid my home off last month. At the age of 55, I can say I am now completely debt free plus if you combine my wife and my salary, we have about 2 years income in the bank. Of course like everybody else my IRA's in the s!@##$r.
Jun 28, 2009 at 6:07 PM Post #9 of 28
thanks for that link majid,
your posts are always knowledgeable and thought provoking.
sort of an article I've read about banana companies influencing governments in SA.
Jun 28, 2009 at 7:17 PM Post #11 of 28

Originally Posted by majid /img/forum/go_quote.gif
This article by a former IMF staffer may change your perspective and explain much of what is going on.

Very informative but also very disturbing. There will be little backbone to do what needs to be done until the economy does it for them. Where will that leave us when it does? The IMF has become the political benefactor of the world. They choose who lives and who dies based on profit.
Jun 28, 2009 at 8:03 PM Post #12 of 28
Manitoba has done very well so far in this economic crisis. The reason is that this is a very static place; in good economic times we spend the same as in the bad times, and for this reason things here haven't gotten too bad yet. I hope the crisis will let up soon, but in all reality it won't until consumers can feel confident in the market once again IMHO.
Jun 28, 2009 at 8:07 PM Post #13 of 28
The Atlantic article was spot on, thanx for the link, majid!

Home prices could very well drop to 1995 pricing and below in some areas, what with the enivetable coming increase in home loan interest, existing overbuilding, and much smaller pool of applicants with perfect credit, add in unemployment and wage stagnation; Yeah, 2017 seems to be a fair bet on a turnaround with actual growth in US GDP.
Jun 28, 2009 at 8:13 PM Post #14 of 28
IMO, even though we're all looking for a scape goat (greedy bankers, ponzi schemes, loose or tight credit ) and a quick fix for this present crisis, the reality is, what we're seeing is a long-overdue reality adjustment of real wealth (or loss of to be more precise) in the historical "have" nations.

Historically, the U.S. and Canada had two important advantages over the rest of the world. First of all, unlike Europe, it was a huge expanse of virgin territory, full of lumber, oil, metals, minerals, water, fish, etc., all waiting to be exploited by it's small but growing hungry, hard working, entrepreneurial, immigrant population. And exploit it they did, at a time when environmental concerns were practically non-existant. By tapping into this abundance, we were able to sell ( mostly raw materials for the longest time ) to the wealthy European nations, creating huge wealth for our own economy, which trickled down into the pockets of most citizens. North America is still blessed with an abundance of most raw materials, but because of increased labour costs, ecological concern costs, and increasing competition from other nations, it's not as profitable as it once was.

Secondly, the two world wars, especially WW2, was a massive boost to our manufacturing industries and therefore real wealth, because unlike Europe and Asia, our factories and infrastructure were not destroyed by war and did not require the huge costs of rebuilding. On the contrary, for at least two decades after WW2, we became the world's shopkeeper, selling raw materials, construction supplies, technology, and everything else that all the war-torn countries required to rebuild. And more importantly, while these countries were rebuilding their infrastructure and factories, and enjoying an era of peace and growing prosperity, we became practically the sole suppliers of consumer and industrial goods to the world. The Fords, GMs, General Electrics, RCAs, Westinghouses, etc., etc., manufactured everything from cars to toasters to cigarettes to TVs for the entire world during the two decades following WW2. Money was flowing into our economy's coffers at an unthinkable rate. It's no co-incidence that the 50's and 60's were a sparkling period of optimism and rapidly improving lifestyles for North Americans. The big flashy cars, the endless rows of suburban bungalows, the new hiways and skyscapers, the abundance of jobs, and the exploding, affluent middle class all happened because of this.

But by the 70's Europe and Japan had managed to rebuild their factories and infrastructures and gradually changed from being huge captive customers of North American goods to being huge, very competitive, competitors. Even though they had to practically start their industrialization process from scratch, fortunately for them, they had the old wealth of centuries of civilization to pay for it, and in the end, they wound up with newer factories and newer machinery than we had ... making them that much more competitive. Enjoying an almost world monopoly on manufacturing for two decades had made us not only wealthy, but complacent, and it took us two more decades to even realize this fact.

Combine this with the fact that our seemingly ever-growing wealth and prosperity brought on a universal human trait ... greed ... and North America's (and later, Europe and Japan's) real wealth started to decline. Workers expected more money for less work...while at the same time, as consumers, they expected more product for less money. For many, with more time and money for recreation, their work ethic and true productivity lowered. A growing group of people started to abuse the enviable and seemingly endless number of social safety nets our economy's wealth had allowed to develop. Sadly, the wealthy class that owned the businesses that provided the jobs and exported products that created the wealth, also sparked by greed, looked at all this and saw a win/win situation for themselves by moving their manufacturing to developing countries where the population had not yet become demanding, resulting in lower wages, taxes, and most other costs to themselves. This allowed them to make more money and made western consumers happy because they could buy more products for less money. The fact that gradually, but at an increasing rate, the jobs ... jobs that not only provided income for many of these same consumers and in the case of jobs manufacturing exported products, brought real wealth into the economy, were now gone. Instead of every toaster purchased creating local jobs and bringing real wealth into the economy, they were now sucking money out of the local economy which with the lost jobs, had less money in circulation to pay for government and all the private sector paper-pusher jobs. A downward spiral.

What makes manufacturing so important to a country's economic well-being is something I think many people don't understand. It's fairly simple actually. When a country sells it's raw materials, it's talent, it's services, and more-so, it's manufactured goods to another country, new money ... another economy's money... flows into it's economy and it becomes financially wealthier. Export manufacturing jobs create new, real wealth for a country. If the U.S. sells a billion dollars of U.S. manufactured toasters to China, not only do a large amount of American citizens get employed and paid, the U.S. now has 1 billion additional dollars circulating in it's economy and China has a bunch of toasters but i billion dollars less circulating in it's economy. Conversely, if the U.S. buys 1 billion dollars of toasters from China, the U.S. economy has 1 billion dollars less circulating in it's economy. It's this circulating money that allows an economy to support the many citizens who are employed in non-wealth-creating jobs. These workers are often acurately or not, grouped under the term "paper pushers". Through them, existing money in the economy gets shuffled around, keeping us all busy and productive. It's not that these non-wealth creating jobs are not important, as they provide other citizens with required services, better living conditions, and often luxury. Government employees are necessary to keep the country functioning ... as are lawyers, bankers, and accountants ... but unless they're billing people in other nations for their services, which most don't, they are not creating wealth for their own country's economy. They are simply shuffling around the money that already exists in that economy. And every time they buy an imported product ... like a Sony stereo or a Mercedes Benz, some of that money goes out of the national economy and out of circulation. Medical personnel, educators, local musicians, restauranteurs, nanny's, cab drivers, consultants, mechanics, and in fact, most occupations, do not create real wealth for their country's economy. They often create wealth for themselves personally, but that wealth is at the expense of fellow citizens, not the citizens of another nation. You pay your lawyer $10,000 and he's $10,000 wealthier and you are $10,000 poorer. The nation's net wealth remains the same. The stronger and healthier an economy is, the more "paper pushers" (Please don't be offended, I'm one of them too) and taxes, it can handle ... keeping everyone employed, fed, sheltered, and comfortable. But again, if a nation (or individual for that matter) is going to be affluent, ( as North America and much of the west has been since the industrial revolution) it must have more money coming in than going out. Unfortunately for us, that hasn't been the case in recent years.

Many of us so far, despite the fact this decline has been happening for years, have managed to delay or at least ignore this very real lessening of our economy's and therefore, our wealth, because we have a cushion of accumulated personal or family wealth, lot's of credit, or because (like many government and big union employees ) we have been receiving a steadily increasing paycheck by living in an unrealistic, completely artificial employment bubble with employer-paid drug and medical benefits, guaranteed pensions, regular, guaranteed wage increases ( no matter what state the economy is in and often unrelated to real productivity ), and even guaranteed employment ( which in the real world is unbelievable ). Unfortunately that group's lifestyle is supported most often at the expense of those who aren't lucky enough to have any of those often unrealistic benefits. If this latter group are unhappy with their job or wages, their only option is to either tough it out or quit. They don't get automatic wage and benefit increases ... if they indeed have any benefits at all. If they're a business owner and the business is losing money, they personally lose money ... even while their employees demand increased wages and benefits. Some day, with so much money leaving our economy as we purchase more and more foreign goods and without new money coming into our economy, even the accumulated personal wealth will dry up for many, and the government and employers ( like the banks and car companies for example) will be forced to face reality and declare bankruptcy ... ending the fairy tale continuous spiral of increased wages, cushy pensions, and guaranteed jobs their employees have long enjoyed. This of course will speed up as the rest of us, who live in the real world economy where if there is more, you get more, and if there is less, you get less, without the protection of government jobs or the extortion ability of unions to make never-ending unrealistic demands, wind up living in complete poverty in the streets. In other words, the recent pain of this "recession" is not being borne equally by everyone. Some aren't feeling a thing, and some are actually earning more than ever. This leaves all the burden on the shoulders of those who don't have guaranteed raises and/or employment. The scary part is, a good number of these folks are the ones who work, or more accurately "worked" for manufacturing companies that even if non-exporters, at minimum, by supplying local markets, kept the money from leaving the country.

Long story short, the basic things that made us wealthy are disappearing and IMO, this ain't no recession, it's a major economic reality check and re-adjustment ... and not a pretty one ... and not the last one. It's long over-do and was not caused by some recent, specific, identifiable event but was rather caused by years of gradual change in the world, some of it a natural evolution and some caused by simple greed and denial. The "have" countries will have less and the the have-not countries will have more. Most westerner's standard of living is dropping, while the standard of living in countries like India, China, Korea, etc., is rising. We used to think of this "sharing the wealth" as a win/win situation because as the population of these poorer countries became more affluent, they could afford buy our manufactured products and we'd get wealthier too ... but wait a minute, we don't manufacture most of the products any longer ... they do. So that old balance no longer exists. Sure, the stock market will continue to waffle up and down in it's completely out-of-touch-with-reality, manipulated realm, and many of those doing the manipulating (the very wealthy) will continue to do fine because of it. But it doesn't matter who or what we blame or which political party is in power, as there is very little anyone can do to fight human greed and human nature, and as someone else already mentioned, any band-aid thing they do, will only eventually make things worse. (Think of the inflation that eventually has to happen with all this new money being borrowed and printed.)

The sad truth is, it's as it's always been ... every man for himself. For the most part we in the west gained our wealth and high standard of living at the expense of others .... others in other countries. The only thing that's changing is that now others from other countries are gaining their wealth from us, and because of this, many of us are now scrambling to maintain the status quo by gaining wealth at our fellow citizen's expense. Can't really blame us however ... it's human nature.
Jun 28, 2009 at 8:38 PM Post #15 of 28
My family owns a Laos/Thai restaurant,where I have worked my whole life. Im only 18 now but I could see the recession coming 3 years ago, when I was 15. It did not take long to notice.When we were busy in 2006 we would hit around 5,000 dollars a night sometimes 6,000 on certain holidays.Compare that to now were we barely make 1,000 dollars on a busy day and we still have the same number of employees to pay as in 2006, around 20 people.5 cooks, 8 or 9 waiters, 2 Accountants,and all of a produce people.I am really afraid this year more than any other, we are just barely getting by and the way business has been so far this summer it is not going to get better anytime soon. I just hope we can make it through this year, if we go out of business I don't know what my family will do ,as most of them don't speak english my older siblings and I usually handle all the business end of the restaurant.Anyway guys thanks for listening.

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