The Party is ending.
Predicting economic turns almost always brings heaps of embarrassment to the predictors. There not much vindication in being correct if your timing is way off. Mine certainly was on December 29th, 2002 when I wrote a short piece predicting a real estate slow-down in 2003.
It didn't happen. In my wildest fantasy it never occurred to me that Congress would go bonkers spending a flood of fantasy money and that Alan Greenspan and his hench-folk at the Federal Reserve would play along by creating the biggest real estate bubble in history. He had to replace the collapsed dot-com bubble with something and shoveling out easy money into the mortgage business was a great way to do it. People suddenly became rich flipping real estate deals.
Almost four years have passed since my embarrassing prediction and I have finally worked up enough nerve to cast an eye at 2007. This time I am taking into consideration some things that I failed to calculate in '02. First, the human capacity to be conned into reckless financial deals runs very strong. Many people burned in the real estate bubble are mending their ways, but the general run of people feels confident that their future is bright. Their jobs are secure, their incomes will increase, and their homes are going to hold their value against the outgoing tide that is affecting many American markets. They do not fear debt. Why should they? They have been taught it's the way to get things you want....now...without having to save up for them.
Look at the acres of subdivisions in your town. How many of those houses are actually owned outright by the occupant? Not many. That's not the American way. Even people in their 50s and 60s aren't alarmed if the bank still holds the mortgage to their house. It's apt to be TWO mortgages, in fact; the principal one and the second mortgage to secure that equity account that allows people to use their homes as ATMs.
Check out the gargantuan car parking lots in metropolitan areas. How many of those cars are owned, outright? Quite a few, perhaps, but the majority of them have finance company liens on them and the titles are parked in a file cabinet awaiting the final payment, if it ever comes. Chances are it won't. The car will be traded for something newer before it's paid for with the old balance rolled into the new one..
Peek into the credit card accounts of Americans and you'll discover a lot of lying is going on. Most of your friends will brag they pay the entire balance each month so as to "avoid paying interest." The average American family is carrying a credit card balance of more than $6,000.00
What about their savings? They will tell you of their 401(k) accounts or money market account, but they really have little in the way of cash they can lay hands on in the case of an emergency. Americans are enthusiastic consumers, not savers. Ad agencies hammer them constantly to get out and spend. When do you hear a perky announcer urging you to hang on to some of your money and let it pile up in a savings account? Without a rainy day fund what will people do if an emergency befalls them and their income stream is interrupted? Sure - tap the home equity loan or the credit card.
I'm not a "doom enthusiast." In fact, it is the fear of doom, or even milder calamities, that cause me to be a somewhat frugal individual. Wal-Mart must hate me. I never go there. I rarely visit retailers of any sort unless I need some specific thing, usually in the hardware or office supply line. My bride badgers me about clothing, but I have an accumulation of garb that will last me until I make the trip to the grave. And I avoid debt like a plague. Those monumental towers of debt that hover over the national government and a large fraction of private citizens will be the undoing of the high standard of materialism the U.S. has created.
So, I'm dusting off my predictions from the end of 2002 and will modify them a little before publishing another bold forecast on December 29th, 2006. I said then the party appeared to be winding down. But government and the Fed paid the band overtime and refilled the punchbowl. But the party is slowing again and there's no more punch in the kitchen. The impending recession can't be postponed without a miracle - and the miracle store is out of stock.
This is a long-winded explanation of my bumper sticker, which was written by Will Rogers: : "You can't break a man that don't borrow!"
John Wrisley, October 9th, 2006
Great Depression, Part 2
Scuttled; The Ship of State
Américains crédules