Random Musings

Just a few thoughts rolling around my head after a great week in Charleston, SC. What a beautiful city, and a living history museum.

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This blurb, taken from a paper titled "The Financial Instability Hypothesis" by Hyman P. Minsky, is an excellent technical description of the current state of economic affairs:

"Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units [defined as those that can fulfill all their contractual payment obligations by their cash flows] to a structure in which there is large weight to units engaged in speculative [units that can meet interest payment obligations out of cash flows, but often must roll over liabilities to re-finance] and Ponzi finance [as the name implies, units that must borrow or sell assets to meet principal and interest payment obligations]. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values."

Likely, indeed.

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Much has been made of John McCain's vision of the world in 2013, but many have missed the subtlety of the date he chose, which is significant. The next Presidential election is in 2012, so by choosing 2013 as the year in which all this will come to pass, he's basically saying, "Elect me, then re-elect me, and all my campaign promises will be fulfilled - but you've got to give me two terms to get it done." White House hopefuls have used this tactic for years.

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Everybody seems to be trying to talk us out of this recession. There's jawboning coming from every angle: the obvious, like the President, Hank Paulson and Ben Bernanke; bank economists; CNBC pundits (naturally); other economists; and general media talking heads. But talking this recession down won't work. Everyone's ignoring the 15% additional decline in real estate values that's coming, the continued increase in homes on the market, looming defaults and foreclosures, and the coming crimp in consumer spending (despite stalwart assertions that the third quarter will see a boost in spending from the tax refunds, the majority of which will be saved, used to reduce debt, or channeled directly into the gas tank.

Word to the wise: brace yourselves.

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Speaking of the rebates, let's put them in their proper perspective. The sum total of the rebates, as part of the overall stimulus package, is about $100 billion. File that factoid away for a minute.

Much of the spending spree of the early years of this decade was fueled by using homes as ATMs. Let's break those numbers down. From 2000 to 2005, mortgage debt grew by about $4 trillion. Half that volume came from refinancing. That's $2 trillion.

A 2002 Fed survey found that 25% of refinance funds were used to make consumer expenditures (dumb, dumb, dumb, but we'll leave that rant to Dave Ramsey). That's $500 billion, over five years, or $100 billion a year. That works out to about 1% of total personal consumption expenditures, or about 0.7% of GDP. And it's dried up now - there's no equity left to tap, and lenders are increasingly reluctant to let homeowners even try to tap it if they have it - so that's a 0.7% drag on output growth, in an economy that's only growing by 0.6% annualized.

Back to the rebates. If 100% of them get spent, that only boosts GDP by 0.7% (and please don't feed me the multiplier effect crap). That only offsets one year's worth of the now-vaporized home equity spending boost, which will remain vaporized for several years. What then?

And, if the more likely scenario of just about 25-40% of the rebate money getting spent materializes - and I'll bet much of that spending would go toward necessities, which now account for about 57% of the average American family budget, vs. less than 52% at the beginning of this decade - the impact is far less, on the order of about 0.2% of GDP.

Some stimulus.