As for the spending thing (and then I'm off the soapbox for the day, I promise)-

Yes, I agree there is a huge amount of PR (personal responsibility) involved in spending habits. But I think it's easy to dismiss the pervasiveness of advertising and the thousands of small and large ways we're pressured to buy buy buy as having no effect, when in fact, I think they are hugely influential on our natures, especially when we're young.

I was a (pardon the pun) a huge fattist for quite a while- I considered obesity the height of personal weakness. As a small female, I got fed up with fat people spotting the empty seat next to me on the bus, plane, whatever and taking advantage of the extra space my small frame afforded them, so I spent many a ride jammed up against someone else's sweaty, smelly excess abdomen. I feel the trade-off for me not being able to reach things on high shelves is that I don't fill up the entire seat on a bus and I never have problems with "leg room," whatever that is. ;) And so I found it unfair to be squished because someone else can't keep her hands out of the Ding-Dong box.

But you know what? Obesity ain't that simple. Admittedly, I don't buy the "genetics' argument because obesity rates have tripled in the past 30 years and we just don't evolve that quickly. But we are surrounded by food. Surrounded. And it's pushed at us relentlessly. And we don't evolve that fast and our bodies and brains are, I think, hard-wired to remember a time when we spent most of our lives starving (heck, obesity was once the height of beauty because it was rare). And I think advertising, etc., takes advantage of that and eventually most people give in. And once fat, I think it's really hard, a lifelong struggle, in fact, to address it. I think losing a large amount of weight is harder than quitting smoking (you still have to eat, after all) and props to those who manage to take off a large amount of weight and keep it off- that's a war they never stop fighting, and in a society where they are surrounded by images and messages saying "eat this! eat this! eat this!"

So yes, body health is a personal responsibility, but I think our culture makes it as difficult as possible to stay healthy- little access to exercise in our car-dominated culture, sedentary jobs and endless push push push of foods that have little nutritional value. Hell, I just had chocolate and wheat thins for breakfast. Mmm! Healthy! Well, I did have a glass of milk, too...

And that carries over to our consumerism. It's a high to buy something. I remember sitting in front of the TV as a kid, listing the things I wanted for Christmas-- in June. I lost that acquisitiveness somewhere in the wake of my mom's death, since you can't buy anything to make THAT feel better, but you know, a lot of kids aren't as lucky as I was to have their mom die. (said with sarcasm. I can't believe I feel it necesary to explain that, but again, people can surprise you with what they don't understand)

Personal responsibility is all well and good and essential, but it's not the entire answer when your entire society is built on a system (advertising) designed to keep you spending more than you have. Is there an easy solution? Gads, no. I'm a believer in regulated capitalism, and a business has to advertise a product. But I think now, in our negative-savings society, we're seeing the effects of unregulated advertising and the thing is, when it comes crashing down, all of us, even those who are saving what they can, will feel it. Just as we had to be the ones to bail out the Savings & Loan crooks. And I think, in a society dominated with a command to buybuybuy it's wrong to permit unregulated lending. It's wrong. It allows wealthy corporations to take advantage of the weak and the poor and that's as close to evil as I can find.

Oh- I forgot- my friends didn't move from Buffalo because my friend's husband's mother was (still is, I think) quite ill and he is her entire support system. Though I imagine your response would be that he shouldn't have had a mom who got sick, right? ;) Or she should have been tough enough to take life without any family around her, right?

I'm also not sure where they would have found the money to move. It's expensive, moving!

Done, promise. I have a play to get written today (not on economics; on aging. With zombies! And cupcakes!) and actors to rehearse. Carry on with your unkind comments without me, hi_Im_god. My heart breaks to think of your low opinion. I'm cut. Really I am. You too, STS. Can you see the virtual tears spilling on my keyboard?

And STS- I worked three jobs in college, along with full-time classes. Nothing like an 8:30AM to 11PM day five days a week and an 8:30-6PM on the other two to really make a girl depressed. So yeah, I know from hard work. Did your wife work, too, while you were working two jobs? What did she do? In my friends' case, he had to limit his search to a night job, because she worked full-time (which was six days' a week, by the way) during the day and they had no money for day care, duh). What did you do with your kids while your wife was (I assume from your tone) working, too? Or wasn't she?

It was a happy ending at the end, though- she was able to switch jobs and found one that also included health insurance, but it took a few years of looking. He's working now, too. But it took time; it's not a magic solution. You have to find the d*mn job.

GOD,
I am hardly a gold bug and currently own no physical gold whatsoever so get your facts straight. I'm not comparing this to 1929 at all. The comparison was to the market being up for X number of days in a time period and that time happens to be 1927. Just a fact....Now most of my post deals with the dollar, nothing else...Our economy isn't going to fall into collapse at all....But if you don't think it has a major effect on inflation you need to look again.

great read Randall I just got around to it, it will be only a matter of time til the dollar roars back as markets in Asia start a downturn as investments start to tumble, alot of Austrailian backers in those sectors will start to see a sharp decline.

the original post in this thread was very good

Rnadall - correct me if i am wrong , but, i think the savings rate in this country is based on after tax dollars - so it is not including payroll deductions into 401k's and 403'bs and standard ira's. If we added those figures in the number would probably increase greatly. Back in the 50's and 60's the savings rate was high because people didn't have te ability to put in pre-tax dollars into mutal funds, they just put $ into the bank. The savings rate also does not include capital gains - so if you bought 100 sahres of exxon and paid $50 a shrare and now it is at $75 a share you are wealthier by 50 % on that $, but, that does not show up in the savings #'s published by the gov't.

Personal savings rate is based on disposable income, so yes your after tax income is basically subtracted from everything you consume...The end result is the savings rate.

You aren't wrong on stocks but realize that investing in the stock market isn't saving. The idea that stocks go up indefinitely is simply wrong. That's why buy and hold is a fallacy. Those who invested in Cisco in 2000 may get even in 2012 if they are lucky. Also consider that as the value of the dollar gets debased, you need to make a higher % stock gain to offset the decreasing currency. But if you are lucky enough to make money in the market---- most people end up spending their paper gains in stock. Heck, if your stocks are up 10 grand, you feel comfortable to spend 5 grand on a vacation. Meanwhile you haven't sold a thing or saved anything. The only years with a negative savings rate since '32 and '33 were 2005 and 2006. Part of this is unquestionably the wealth effect which in '05 made people spend based on the increased value of their homes. But as home prices have started to decline, you can't cash out on your home anymore and those with ARMs as loans are really feeling the pinch.

I guess my point here is that rainy days do happen. So a negative savings rate is really rolling the dice.

A Bump
 

Yes, a Randall sighting. I post only on economic message boards as I've gone back to really what my background is. Love the ponies but I'm transfixed by what a cluster**** situation the economy is in.


This thread was started on May 8th of '07. Since then the dollar has weakened another 8.5%. Oil has gone from 65 to 100. And gold has gone from 680 to 870. The XHB, Homebuliders Index is down by half. All this has happened in the span of 7 months. The pundits like to point to an up market for '07 which is ridiculous. Use the gain against inflation+dollar decline and you'll see you lost money and purchasing power in '07.

I have a deli I go to everyday to eat, one of the best in New Jersey. The owner is a close friend. In the span of 6 months his wheat prices doubled. This is unheard of, he's never seen anything like it in his entire life. Look at eggs, milk, etc... The grocery store story I used in my original post simply came about far faster than I ever thought was possible. And realize the rosey inflation figures they like to give you ex out food and energy. Why? Well who wants to hear what real inflation is. Plus, the cost of living increase in Social Security each year is partially based on government figures for inflation and wage earnings....Quite a nice reason to lowball the numbers, right? The rest of the world isn't stupid which is why they are selling the dollar like there is no tomorrow.

So what's next? Well you saw unemployment tick to 5% this morning and the market tank. First let me say, I hate using the stock market as a proxy for the economy. Because it is figured in nominal terms, so much of economic weakness is hidden. Plus that unemployment rate is artifically low. Many people have stopped looking for jobs. The birth death model puts about 125,000 new jobs a month to keep up with population growth. Thus, when people get goosed by a decent jobs number they should take that into account.

Where do you go from here? Well people scream for rate cuts, mainly to save housing, because people used it as an ATM machine and a negative savings rate with a declining home value = death....That bailout plan on subprime was laughable by the way. It will help very few and simply slow the process of foreclosures. It also makes banks not want to lend with the government able to fix rates whenever they feel like it.

Now to the banks. Their balance sheets are an absolute joke. Back in August when TSHTF some of these banks chose to give writedowns in dribs and drabs. Citigroup for instance had an earnings report which literally looked like an Enron sheet, complete with a complete lack of transparency for the amount of derivatives tied to subprime loans. Since August they've gone down the shitter. And who knows what their writedowns will be going forward. I don't. You can hope that the Middle East guys flush with cash will keep cash infusions going to these banks. Give them a floor? Maybe, but its short term. And its not like they'll keep doing it when their investments continue to go down in value which they have. Bank of America gave Countrywide an infusion in August based on an 18 dollar share price. Seemed like a good deal at the time, right? Well now CFC is 8. Not a good return on investment is it.

So going forward: The FED cuts but that's not the problem. It isn't a lack of money, its a lack of lending. Who wants to lend from bank to bank when you don't know if you'll get paid? Meanwhile the cheaper money floods the system and raises everything from wheat to meat to oil to gold to fertilizer etc. etc.

Truthfully, I am bumping this(and making an appearance) because it is still so important that people realize what is going on in the economy...So if you feel like talking economics with me, I'm looking forward to doing so. It affects us all, no matter what you do for a living. Randall

Thanks for the post Randall. You have my vote for president.

I regret that it took a while to find this thread because it is fascinating reading...even for an economic layman. The ticking time bomb in my World is the continuing devaluation of the RMB and the lack of focus that US retailers have given it. All major chains either refuse cost increases or hold "auctions" for low bids and keep assuming that Asia is a bottomless pit of yearly cost decreases. That is so over. The lead paint issues that surfaced this year are just the tip of the iceberg over what will happen in the next 3-5 years as China factories demand currency and labor cost equality. There are three supposedly "immoveable" parties here...the factory, the retailer and the consumer. One is about to give in a big way and everyone will feel the consequences.

I expect exporters will have a good roll.
We have been the ultimate consumer nation
for so long. Maybe this will cause us to save
more and produce more for demand in other
nations.

Lots of technostuff we make much better than
any other country. And I think we are just touching
the tip of the techno iceberg. Little stuff coming.
Nano-technology as one small example could have
a huge effect on so many things. In the field of
medicine no one touches this country.

The number of new machines coming out to measure
so many diff. medical problems. I see a big upside in our
ability here. I could go on. I am a science guy and I
have never seen so many incredible leaps (a few of which
might actually lead to some technological advance.)

I also see the economy of other nations causing huge
environmental problems. China and India are going to
experience serious health problems in their work force.
They might looking for solutions we already have sitting
but no reason to use quite yet.

Oil and inflation could be a long term blessing in disguise.
I feel this will lead to genuine ingenuity in energy.

But I could be very wrong. Nice to see you post again.

Randall,

Good stuff here and I'm impressed us pony lovers are smarter than I thought.

I for one come from a manufacturing back ground and seen the quick demise in the USA as a real source of concern. The retailers i.e. Walmarting of America, are just too string and too much influence.

However, for me the central issue is what will happen when the war is over. I believe that war spending is fueling our economy with goods and services for the military. The greatest increase in jobs is in the military. When it goes, and I hope it does, that's a whole lot of loot and a whole lot of action sucked out of what is already a weak economy.

It's disheartening to hear our politicians speak nothing of the real issues. Seems like there are so many things going bad.

Too bad for the children.

Spyder

The devaluation of the dollar could put the US labor force into third world price levels. Manufacturing will might come back to life.

Nice to see you back Rand.

randallscott35 is "day trader" economist. GenuineRisk is income redistributionist. GR, you can redistribute income all you want, but income earners will trample you if you attempt to redistribute their wealth.

1. US is still largest economy on Planet Earth.
2. All economics is cyclical.
3. Y = C + I + G + (X-M) Basic Keynesian theory still drives fiscal policy.
4. Money supply still drives economic growth and inflation. Fed still practices what Milton Friedman preached.
5. Dollar has more competition today, but still is world currency. I haven't been to a country yet where dollar isn't accepted by locals.
6. Gold and silver and other precious metals come & go. Hard currency advocates usually get their heads served on their own "silver platter."

I am watching LSU dominate OSU. Roughing the kicker... another OSU oops! More economics at later date. GEAUX TIGERS! SEC RULES!!!

Seems like as good a time as any for an update since a few weeks back.

Since then, you had a hysterical display by Bank of America (my bank by the way) last week throwing good money at bad. In the last installment we looked at the fact that they bought into the company in August and after a 75% haircut they decided they might as buy the whole damn thing. The CEO had egg on his face for the purchase and this was a way to claim victory and call it value. Mind you since the announcement, CFC stock has gone from 8 back to 5.75. My call is that this deal never actually closes. BAC is taking on basically all the future litigation by states and individuals against CFC for an equity in a company in the death spiral. It makes zero sense and just shows that financial companies are still not coming clean about their problems. Understand the FED said "they were aware of the talks between the two companies." Translation = we are quite happy someone took CFC(the largest mortgage company in the U.S.) from going bankrupt. A wink and a nod and BAC and their shareholders take one for the team.

Then we get to this morning with Citigroup who back in August showed a strange balance sheet. Well they write down some of their losses, not nearly enough, and the market laughs and chops another 7% off the largest bank in the U.S...Did I mention that on page 11 of their release they said they may have 230 billion is suspect loans to home borrowers. What did they write down, 10 billion this morning? This is beyond best case scenario. Sure they cut the dividend but they didn't cut it enough. This company is fighting for survival whether anyone realizes it or not. For the second time in months they needed a huge capital infusion just to keep chugging along. Realize something shareholders of these banks getting the infusion, they are giving equity(yours) and diluting the shares you own by giving % of the company away or giving notes worth high interest rates. I keep hearing how nice it is and this will stop the bleeding. No it won't. It prolongs the bleeding. The patient, especially in the case of a Washington Mutual and CFC are dead. You can plug holes and another one opens.

What happened? CDO is a collateralized debt obligation and essentially means that there are supposed to be assets backing them(a range of assets with different credit qualities) and giving investors a return on their investment. The problem is these were rated as safe investments with superior AAA standings in some cases. Would you eat a filet mignon with a tiny piece of feces on it? Probably not, but people bought into these not realizing that piece of these were backed by mortgages that were bound to fail. And then you are screwed b/c they become worth less and less and banks can't price them because they don't know the ultimate end with regard to bad loans. They are guessing. No one wants them.

The worse the housing market gets the more likely people with prime mortgages will default. Why? Not necessarily because they can't make the payments but b/c it makes sense. Watch closely the next 6 months and count the number of times you hear the expression "jingle mail" on TV or in the newspaper. If you put 50k down on your home and its lost 100k in value you have negative equity in your home. At a certain point you are better off mailing the keys back to your bank and taking the credit beating than holding onto your home. An ugly choice and not one I envy people making.

An aside here for a second on the mortgage market. I have a friend who has given loans for the past 2 years at a mortgage company. He said basically if you had a pulse 2 years ago you could get 400k loan. NINJA--no income, no job, no assets.....no problem!! Haha. Well thats fine and dandy when prices go up but the effect when they decline is pernicious(SAT word). The market was kept artificially high by allowing anyone with a first name to come in and purchase a home with funny money. It is the opposite effect when people can't get financing.

And this is why the magical rate cuts coming won't work! All they will do is weaken the dollar and cause commodities to go up even more. Banks don't want to lend and people don't want to borrow when a recession is coming and banks already have no idea what their ultimate damage will be on writedowns. Gold is talking here. Sure I took shots early in this thread for a call on a shiny metal. Made sense since it has underperformed for decades but times change and monetart policy gets dicey and bang...People aren't buying more jewelry, the price is going up because of inflation and nothing more. I am not a nut who thinks we will be paying for things in gold coins 5 years from now. You can't put the genie back in the bottle. I do, however, believe that taking your medicine and allowing some of the weaker financial institutions to go bankrupt is a better idea than pissing away people's savings through dollar depreciation.

Make no mistake this is now and is going to be ugly. No, the sky isn't falling but a recession is not priced into the stock market or the general economy at large. And since I don't buy government numbers let your "soul be your pilot." You know what you feel and see, no matter what you do for a living. So think for yourself and be smart going forward here. For the record all this happening is good in the long run. Banks will be regulated and the ones that survive will be stronger...There will be a time to take on debt also. If you think that other than a short bounce in the dollar the trend will continue to go down there comes a time when you should take on debt. Why? Well because you will be paying back that debt, mortgage or other(not credit cards--bad!) with dollars that are worth less as time goes on. Good for you, not for them....But we aren't there and I wouldn't tell you to do it yet.

I know this was a mishmash by the way…I'll stick to one topic next time since I was all over the place today. Sorry about that. I will tackle energy and more to the point "ethanol" and what a serious misjudgment this country made by promoting it. Long term consequences that people aren't talking about! Randall

Most of this makes perfect sense.
I remember when I purchased my
house we had to reveal almost
everything about our entire lives
in order to get a 10.5 % 30 year mortage. 1987...
Paid off because of "lucky" (its good knowing
people who have a job investing their family money)
aided by good advice by the same person who nailed the fact
that the stock market would rally after the Gulf War (1990).

But I have lived through a lot of changes (48 years). My house
evaluation goes up and down all the time. A house is
not the same as a car. Cars almost always lose value.
Houses fluctuate. So I got a bit of a problem giving up
the keys because "the certain point is not defined". I also
have never considered my house an investment. It may
or it may not turn out to be a good return. It is a place to
live. Its obvious a lot of people did not consider houses this
way. And its very clear some people should get nada as
they were trying to make some quick bucks before things
fell through by buyn and reselling. The bailout for these folks
is a bit sickening but no one seems to know for sure who did
what.

Further. If you can tell me what a recession is, I would
appreciate it, as all the people that seem to understand economics
have diff. definitions. Seems like a very scary word, but I have
apparently lived through these before and did not realize it.

And as C. Simon already indicated, those international stock funds
have just busted loose with a weak dollar. Diversification really does
work.

Anyways, the dream of owning a home is a strong lure
and people seem to think it is a right written in the
constitution. I understand the desire, but it took a lot
of hard work for me.
Thanks for posting. I dont mind the
rambling, it is interesting.

I look forward to your views on energy.

Thanks for the posts Randall, rambling or not.

And for people like me who aren't big on numbers, here is a quick read on the differences between a million, billion, trillion, etc.

http://www.tysknews.com/Depts/Taxes/million.htm

The chick of awe.
Awesome.

Tis how I feel.

Good stuff, Randall, though I'm heading more towards "the sky is falling" the more I read on the housing loan situation, which is now spilling into auto loan. I sure hope I'm wrong.

There is some theorizing that what we're seeing is the end of what has been considered the American Way of Life (really just for the past 50 years, but people get quickly adjusted to being comfortable)- interesting blog post:

http://jameshowardkunstler.typepad.c...er****_nation/

I also found comments on John Cole's Balloon-Juice's thread, "We Are All Sub-prime, Now" interesting reading:

http://www.balloon-juice.com/?p=9510#comments

I don't know what I think about it- I'm not good at snap judgments so I have to mull most things, but I do think this is bigger than a year-long recession.

And I don't think the gov't will leave things alone and let the industries that should fail, fail. They didn't during the junk-bond scandal of the 1980's- instead, they bailed out the industry and passed the bill along to you and me. Or rather, my parent, as I wasn't working yet, though I'm sure I'm probably still paying for it, as our DT'ers kids will be paying for Iraq. Borrow and spend, that's our Administration's way. And Americans adopted it as their own way, too.

It's funny when I get accused of favoring "redistribution of income" because what we have now is just as much about redistribution of income; it's just that it's distributing it upwards, through corporate welfare, inflated executive salary, underpaid rank-and-file workers and an increasingly regressive tax rate. Who was it who said it was wrong that his secretary paid a higher tax rate than he did? Buffet? Gates? One of them. The US gov't has a great hand in redistributing income- it sends it to the top, where most of it stays. Hey, if you're satisfied with how things are going, great; you know how to vote in 2008. Me, I don't think that's right; I prefer a society with a middle class. And I don't think a higher top tax rate will lead to violence and rioting in the streets- Europe has a lot of riots, but I don't recall any being linked to the tax rate. The wealthy don't resort to violence; they don't have to. They resort to white-collar crime and bribing gov't officials.

We've been redistributing income upwards for 50 years now, while at the same time telling middle- and lower-class Americans they can still have it all and not pay for it and now the cracks are really starting to show. It took us quite a while to get here, and it'll take quite a while to get back out. If we can- now we also deal with a world that is catching up to us, and is going to want their fair share of the resource pie. And that's not going to shift back in our favor- the US share of the world GNP is declining and it's going to continue. And as their purchasing power increases, we may see ourselves competing for the same cheap crap we depend on them selling us now. And we don't have the manufacturing jobs to make it ourselves.

As for solutions? I don't know. Re-regulate the credit industry for one- put a limit on interest rates so Americans in debt have a chance to dig themselves back out. Regulate loaning. And yes, for once, let the companies that should go under, go under.

But how do you tell Americans to save when the nation's economy depends on them going shopping?

There are a lot of foreclosed houses in the neighborhood I'm in right now (I'm living out of town for a few weeks)- it's really depressing.

I wonder if maybe the Baby Boomers are really God's chosen people- born after the Great Depression and most of them will die before the bill fully comes due for the easy life most of them lived, economically speaking.

(No offense to the Boomers- very grateful for Civil Rights and Women's Lib and all that. The Beatles were pretty good, too. ;) )

Thanks for posting, Randall. Good to hear from you again.