Money

Here is where we are:

The Fed was trying to encourage business growth in previous years, in order to stimulate the economy, and thus kept adjusting interest rates. Normal Americans took advantage of the low interest rates that were so abundant, and used them to borrow against the equity in their houses for a variety of things (remodels, vacations, bills, college, etc.). Companies got used to us spending that level of income. We got used to spending it, and having those flashy toys. Things were good. Everyone was cool. Consumers were happy – we thought we had an investment that could do nothing but mature and continue to make us money, so we were all happy with the “minimal” risk involved in taking out all our cash on hand. We didn’t even mind paying almost double or more than double for our vacations abroad – because we were flush with our borrowed cash.

But haven’t you ever wondered, as you were driving around, where folks were getting the money from to afford those $800,000 homes? Or why your neighbor suddenly had two BMW’s? Did mankind suddenly evolve the ability to shit gold (and, by the way, I certainly wish this were the case although I believe it would be rather painful)?

Fast forward.

The market has an enormous contraction. Those folk in the sub prime market that were at risk in the first place, that locked into variable rate loans? They were the first ones to feel the pain when the Fed started raising rates. Half a point doesn’t sound like a lot, but could be an extra $200 a month (depending on the size of your loan, your terms, etc.). If you are already marginal, and overextended, where is that bump going to come from? Sure, a number of them gambled on being able to turn their house and sell it prior to the rates rising, or to have enough market equity to be able to refinance at a lower rate (this assumes that the market growth was 20% or more). Most of them lost that gamble.

That’s the first problem.

Here’s the second.

Our domestic spending (and by this I mean you and I, and not the gub’ment). All that money we borrowed against our houses last year or the year prior is long gone. It might be sitting in your driveway or in your new kitchen or stuck in a photo album somewhere, but it’s long gone. Now you still owe that money, and your house is still stuck at about the same value. You can’t continue to live the lifestyle you were living based on earned income alone, so what do most Americans do? Turn to plastic. And then what happens? The more you spend on a card, on all cards, the tighter the card companies are going to become in their treatment of you. Sure, they want to encourage you to open new lines of credit…they want you to spend, and spend lots – it’s how they make money. Better yet, they want you to carry a balance, a big one, so that they can zonk you with all sorts of fees and charges. Goodness forbid you ever miss a payment on any other card, because now any card company can adjust your account based off your behavior with another service provider. Doesn’t that suck?

Back to the point. Credit card companies want to make money, but they want to protect their unsecured little bottom lines. So what do they do – they quietly start tacking on more fees, they change their rates but send out mailers in unmarked envelopes with opt outs in unmarked envelopes (I even got one that was mailed separately, and I think this was from my BANK!).

Where we will end up is this: soon, consumers will have nothing left to spend (credit maxed, cash on hand tied up in immediate bills, no savings). How will retailers continue to move product? How will services firms continue to sell services? How will financial firms make money?

You’ve seen a lot of news in the past few weeks about other countries dumping their reserves into our economy, or snapping up some of our companies through mergers and acquisitions. That’s not really good news. The fact that other governments feel the need to pump money into our economy (thanks, China) means that they recognize the fact that our economies are co dependent upon each other, and that a failure in our economy would have a substantial ripple effect on theirs. I mean, where would China export all their product to if not the U.S.? It really is a global economy these days.

It’s all a vicious cycle. The more you spend, the less you have. The more you spend, the more companies make, the more they are inclined to spend on growth, and the more people are likely to have access to new jobs. New jobs mean more growth in other industries (housing, services, etc). The less you spend, the less everyone has. You spend less, companies have less, do not grow (hoard), begin to cost cut (forcing folks out of jobs), and everything suddenly goes to pot.

The armchair, dilettante economist here (spits out wad o’tobaccy) thinks that we are in for a bit of a hard fall here. Normal people had too much invested in their homes, and not enough in cash reserve (myself included in this lunacy). The gubment loves the weak dollar – it means that all goods manufactured here (the precious few that still are) are cheap cheap cheap and that’s usually an incentive for folks abroad to buy. If people are coming down from Canada to buy luxury cars in the U.S. because they can save $30K…that’s the sign of a REALLY weak dollar. While the weak dollar is great for businesses, and great for the government, is it really that great for the consumer? And once we stop selling the interest on our deficit to other countries, or our currency becomes so devalued that no one wants to buy it, what then? It’s like I’ve always said…how can you owe yourself money?

Anyway, now I’m rambling and have rather lost the plot.

What I’m saying is this: I think we’re headed for a recession. The long predicted housing bust has hurt more people and businesses than predicted. Tighten your belts, folks, and hang onto those wallets. It’s gonna be a long ride.