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Debt Deflation

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By golfwaymore
February 25, 2003

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SloanT writes,

I'll bite. Please tell me why we are heading for a depression. I think it quite possible that we could experience a moderate recession, like the early 80's, or a severe recession, like the mid-70's

I'll provide some VERY general reasons why I think a depression is likely. Some of them have been picked apart here at REHP, some haven't.

While I'll agree that an economic laundry list of problems could have been established at any point down through our history, I feel that past times have been more akin to slight bleeding, and now we have some major arteries preparing to hemorrhage. It's my opinion that the following conditions don't have to worsen equally, but that the economic impact of them working in concert will be very significant.

Capital Risk Taking Is Rewarded Less and Risks are Unquantifiable

Taxation and legal liability [primarily the latter] are spoiling our capital system. A business owner's liability for employees and product apparently has no bounds, and the fight to prove that bounds do exist is expensive. An unknown downside risk for this one component of running a business makes it impossible to assess risk v. reward, which makes risk taking unattractive at the current time, IMHO.

Geo-political, We are Now the Enemy

We have an increasing faction of the world's fastest growing religion that wants to see us dead. Not our just our President, our leaders, our military dead, but our citizens dead as well. I seriously doubt the resolve of these militants is stronger than our resolve to be free. However, I think we're grossly under estimating the mal effects their sustained attacks will have over the decades ahead.

Investor Confidence in the Equity Markets Shattered

The executives and boards of a few publicly traded companies have reached all time creativity highs in finding ways to screw shareholders. Even the most experienced CPA's have great difficulty solving the riddles and mysteries these execs use to disguise their thievery; it's absurd to believe that analysts, regulatory bodies, and/or ourselves [as investors] will be able to do the same.

Short Term Corporate Vision and Executive Compensation

The executives of public companies fear the short-term reactions of Wall Street more than they value the long-term health of the companies they are running. Most of this is due to the greed stemming from being compensated largely by options packages that fluctuate wildly with short-term company trends. Rather than operating companies as long term owners, many executives gear their management efforts like a crack head, willing to make any move to score the next fix, and cash out the options grants at a temporary high. As usual, shareholders will pick up the pieces, again. Through all the pain of the past 3 years, this situation amazingly still remains "unfixed".

Healthcare Economic Drain

People are stunned at the effects that a few dollars per barrel of oil [either direction] can have on our economy. How much different can the effects of healthcare costs be as they compound at rates north of 14%? We consider ourselves too advanced as a society to merely let people who cant afford it "just die". So in the end, some government, which is really all of us, will pick up the tab. We all pay, and I don't see how healthcare costs wont begin to cripple the economy in the years ahead.

Certain and Drastically Increasing Taxation

Tax rates are being cut now, but those cuts are unsustainable. The increasing drag that Social Security and Medicare place on general revenues must come to a head at some point in the near future. With the bulk of the population soon to be on the recipient end of the entitlement, I have to think that increasing taxation on the workforce will be the only solution pursued.

Loss of Manufacturing Base

In the interest of free trade, the U.S. now manufactures almost nothing. Granted, we've felt the short term stimulation provided by cheap imported consumer goods, which continue to ratchet prices downward. What we are only beginning to feel, IMHO, is the declining wage base resulting from turning ourselves into a system that is at least partly dominated by low tech, service economy work. It would be nice if all the former manufacturing folks were retrained, suddenly educated, and now employed by high tech service companies, wearing lab coats and smocks and receiving equivalent wages. A great many of them aren't, however, and they're stuffing boxes, or running cash registers, or doing menial tasks for a wage that is a fraction of what they once made. I don't deny that our economy is able to eventually make the complete transition, but it will take time, a long time IMHO, maybe several decades. I have never understood, however, how free trade with developing nations will bring their standards of living up, without pulling ours downward.

Declining Work Ethic

We're spoiled. Telegraph can pick up here and rant better than I.

Personal Debt

Whether credit cards, HEL's, homes that we cant afford, automobiles with costs approaching that of starter homes, most consumers have very little ownership of anything. The titles may have their names on it, but these items are merely being rented from month to month, using the lender's money until the debt can be rolled onto some other asset. This juggling act works fine for a while, but the slightest misstep will likely result in a lot of dropped balls.

Savings Rate

As a nation of consumers, we're broke. If unemployment reaches 12% as in 1980, there are no savings to dip into for most, and the looming personal debt will have a disastrous effect on all reaches of the economy.

This is a good stopping point. <grin>


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