Characteristics of an Economic Depression

Markets proved they could still fall yesterday. After having rallied for 15 of the previous 18 sessions, we were beginning to wonder if it were still possible…

In an interesting turn of events, investors actually succumbed to the harsh economic realities of the day. There’s no telling how long this momentary lapse of unreason may last, of course, but we’ll take what we can get while we can get it.

The primary catalyst for the relatively minor pullback in stocks was a relatively major slump in the sale of new houses. Figures from the United States Department of Commerce revealed that, during the month of February, new home sales decreased 2.2% to an annual pace of 308,000, a record low. Pundits blamed blizzards, unemployment and foreclosures for the depressing statistic.

The infamous “Snowmageddon” weather earlier this year may have been uncharacteristically severe…but the level of unemployment and the alarming rate of foreclosures are characteristically severe…characteristic of a depression, that is. In other words, the former variable may be fleeting, but it would be unusual, to say the least, if the latter two magically improved with the turn of the season.

Officially, unemployment is hovering around a quarter-of-a-century high, near 10%. The broader “U6” figure – which also factors in “discouraged workers,” “marginally attached workers” and those who want to work full time, but cannot due to economic reasons – is closer to 17%. And that’s not even the worst estimate. The alternate rate provided by John Williams of Shadow Government Statistics, sits just shy of 22%; again, figures one might deem as characteristic of a depression.

As for foreclosures, RealtyTrac Inc. forecasts that figure will reach a record 3 million this year. Other sources give much higher estimates, citing a worsening job scenario and the expiration of first-time buyer tax credit as points of lingering concern. Meanwhile, as Wall Street indexes march ever higher, American home “owners” continue to receive their marching orders.

The city of Las Vegas, for example, recorded over 3,000 foreclosures in February, up almost 30% from the previous month. Spring, a small town in Texas, witnessed a 45% spike from January. And in Janesville, Wisconsin, even would-be politicians can’t afford to keep a roof over their head. According to a local paper, a candidate for city council K. Andreah Briarmoon has already lost one of her local properties…with three more already in foreclosure. Not content with personal bankruptcy, Briarmoon now has her sights set on running for local office.

As the paper reports, “Briarmoon has been campaigning on a platform urging the city to buy properties at sheriff’s sales and sell them back to the former property owners on land contracts at much lower interest rates.”

There’s nothing wrong with someone wanting more than they can afford…it’s when they get it that the cracks begin to appear. All over America, banks made loans they couldn’t afford to make to people who couldn’t afford to repay them. The solution, as fellow reckoners have already guessed, would be to allow the market enough space to establish real world price discovery. Prices must be permitted to fall to “affordable” levels, in other words; levels that would inspire some level of market clearing.

Alas, what is good for the economy and what is politically expedient is rarely one and the same thing. The voting public, by and large, won’t tolerate a “leave alone” government. They want their elected leaders to “do something,” to step in and relieve them from the financial pains of a generation worth of overconsumption. In short, they want their government to force someone else – anyone else! – to pick up the tab for them.

A recent survey conducted by Bloomberg reveals as much:

“Nine of 10 Americans believe that cutting the deficit, which is projected to reach a record $1.5 trillion this year, will require sacrifices from middle-class Americans. Still, when asked about a range of potential tax increases and spending cuts to address the problem, the large majorities of Americans favor tax increases that only affect the wealthy.”

In other words, almost everyone is in favor of cutting the deficit…as long as it’s someone else doing the cutting. Meanwhile, they still need the government to pitch in and save the auto industry…the banking industry…their local plants, hospitals and schools. They need universal healthcare and “green jobs” initiatives. They need welfare programs, safety nets, longer holidays and shorter working hours and a community hall. They need the government to stimulate the economy, to get it out of this slump.

They don’t realize that the more the government does, the more it guarantees the opposite.

Joel Bowman
for The Daily Reckoning