meta: I in no way pretend to be as good as bonddad or Jerome a Paris at breaking down economic things here, but I've been reading their blogs for quite a bit and this economy issue has become more and more important to me - especially since as a resident of the Detroit area I'm in one of the epicenters of the worst this economy has to offer. I know I'll say what they've said, but amidst the siege of candidate diaries, some important issues are getting buried, and I believe this is one of the more important ones that really needs attention. So, sorry if it sounds like a broken record to some.
(Cross-posted @ SecondPageMedia.)
The headlines are bubbling up with disturbing frequency. From today's Times Online: Hedge funds on the brink as US Federal Reserve cash fails to ease crisis. Today, Bear Sterns is down more than 40% on word that the federal government & JP Morgan are trying a last ditch attempt to keep the bank solvent.
Of all the things to go wrong this decade (of which there have been a landslide) perhaps the longest lasting effect to Americans as we move into the next decade and beyond is the significant damage done to our economic future. When the most powerful financial institutions on the planet are having a hard time remaining solvent, there's a serious problem out there. The article peers into the blood being let in the financial markets:
The potential closure of six funds came as a leading private equity executive, who declined to be named, said that such funds were "snapping like twigs", with one failing every day.
Yesterday Patti Cook, Freddie Mac’s chief business officer, predicted that the Federal Reserve’s $200 billion bond lending facility this week would fail to solve the long-term problem of Wall Street’s deepening credit crisis.
The funds’ predicament – seven funds have been frozen this month – was seen as evidence that the initiative by America’s central bank to allow lenders to swap their risky mortgage-backed bonds for safer Treasury debt, will be of help only in the short term. Those fears hit the dollar and New York equity markets, with the greenback falling to a new low against the euro and sterling, as the European currency hit $1.55 for the first time.
The last bit of that quote is where Americans are beginning to feel this pain in earnest. For a good portion of this decade, we have been somewhat insulated from our financial problems just because we spend a vast majority of our lives and our money within this country - it's hard to see the effects of a steadily falling dollar when you don't have much experience with, say, buying things in Europe or Canada on a weekly or monthly basis. Eventually, however, as a currency continues a downward spiral, it will push up upon the prices of everything priced in it - since, simply enough, it's just not worth what it used to be.
This can be simply spelled out in charts.
US Dollar vs. Canadian Dollar: from $1.62 to $0.98 (-39.5%)
US Dollar vs. British Pound: from $0.73 to $0.49 (-32.88%)
US Dollar vs. Euro: from $1.22 to $0.63 (-48.36%)
These charts are all since 2000. These massive declines have been racked up only within the span of this decade. These aren't slow long term declines in the U.S. Dollar, these are steep dives in the former world's most powerful currency. Above were merely three currencies as they pertain to the US dollar. The US Dollar Index is a weighted average of a basket of select currencies and their performance vs. the dollar, it also bares the same downward spiral:
From 119.72 to 72 (-39.86%)
Across the board, an on-average nearly 40% dive in the value of the dollar, and that is just within the last six years. In that dollar index chart alone 2008 is already showing more than a 6% decline, and we are only in March.
What are the immediate effects of such a steep drop in our currency? It puts extreme upward pressure on anything and everything. This has really kicked in especially within the last year to two years, and has been building before that for the better part of this decade.
Metals
* Aluminum: up 76% in 4.5 years
* Copper: up 333% in 5 years
* Platinum: up 353% in 9 years
* Silver: up 272% in 6 years
* Gold: up 300% in 7 years
Food
* Canola: up 133% in 2 years
* Cocoa: up 206% in 7 years
* Coffee: up 170% in 6 years
* Corn: up 150% in 2 years
* Oats: up 160% in 3.5 years
* Rice: up 239% in 6 years
* Soybeans: up 134% in 1.5 years
* Wheat: up 200% in 2 years
Fuel
* Brent Crude Oil: up 900% in 9 years
* Heating Oil: up 450% in 9 years
* Light Crude Oil: up 850% in 9 years
* Propane: up 190% in 9 years
(source)
During this time, how much have your wages gone up? For the average American, down about 2%. If you made $50,000 a year in 2000, you would need to be at $61,289.20 just to keep pace with inflation today. To actually "get ahead" in the world (to do what raises are supposed to accomplish), you would need to be further ahead of that number.
That high school $8/hr job in 2000 would bring in $9.81 today. How many supermarkets are paying that, though? In many places, they're still paying $8, or even less. That $8/hr job today was worth $6.53 only 8 years ago.
As wages has stagnated and the price of everything has soared, Americans have tended to find another way to get income - the equity that is stored within the value of one's home. From this last gamble to hang on to the American Dream that was the good times of the 1990's, we witnessed what may perhaps be the greatest bubble and crash in our lives: the housing bubble.
The average price of a home rose in the 90's from 75k to 100k (+33% or 3.3% / yr)
...from 2000 - 2006 from 100k to 190k (+90% or 15% / yr)
...from 2006 - 2007 from 190k to 170k (-10.52% / yr)
However, the housing market isn't just hitting the breaks, it's falling off of a cliff, and taking the economy with it. With the end of rising housing prices, and people no longer able to flip their home for a quick cash infusion, people have been scrambling to come up with extra money to pay rising mortgage payments (as most of the homes sold after the middle of this decade were fueled by adjustable rate mortgages). Foreclosures are at all time highs. People who own homes are giving up. 401k's are being slaughtered as people try to save their homes:
Struggling to save their homes from foreclosure, more Americans are raiding their 401(k) retirement accounts to pay their bills — and getting slammed with taxes and penalties in the process, according to retirement plan administrators. . . .
Such hardship withdrawals began rising last year and, by January this year, had exceeded January 2007 levels. During the first month of the year, as the economic slowdown tightened pressure on mortgage holders, hardship withdrawals rose 23% at plans that Merrill Lynch (MER) administers, compared with the same period in 2007, says Kevin Crain, managing director of the Merrill Lynch Retirement Group.
The 401(k) withdrawals are rising mainly because people such as Campbell and her husband want to save their homes. Merrill Lynch found that the primary reason for the rise in hardship withdrawals was to prevent foreclosure or eviction, based on its sampling of applications filed in January.
Likewise, in the first month of the year, compared with January 2007, Great-West Retirement Services saw a 20% increase in hardship withdrawals to save a home. And Principal Financial (PFG) reports that in January it received 245 calls from participants who inquired about 401(k) withdrawals to prevent a foreclosure or eviction, up dramatically from 45 similar calls it received in January 2007.
Jobs are also being shed left and right.
The residential construction sector has lost 450,000 jobs
since the start of 2006.
Construction spending has fallen from $700bn to $450bn (-35.71%)
since 2006
Desperation is seen in the numbers no matter where you look. The total household debt as a percentage of the Gross Domestic Product of this country is 92.28% as of 2005, and expected to be at 97.64% by 2010 - it was 69.96% in 2000. Worse yet is how long it will take Americans to dig out from this debt. Household debt as a percentage of disposable personal income was 125.85% as of 2005, expected to rise to 132.98% by 2010, and was "only" 95.88% in 2000.
The fix is in and the game is pretty much over. No matter which way you look at it, this economy is very screwed - the consequences at making no attempts to raise wages for a decade, starting an extremely expensive war, and cutting taxes all at the same time - while also loosening regulations that allowed for easier and more manipulative borrowing to people who just shouldn't have gotten those sorts of loans. Now everyone is calling and looking for their money. As lenders gradually find out that nobody has the money, the economic outlook gets more realistic, more grim, and it might just be finally dawning exactly what kind of disaster is upon us.
I will end this with one last chart, a chart that I believe sums up how fake the "recovery" in the U.S. markets have been during portions of this decade and how this economy hasn’t really moved in any positive direction in six to seven years. Below is a chart of the Dow: priced in US Dollars (which is what you see when you look it up), and the Dow priced in Euros. Factor in the steady decline in the dollar, and you see all the gains that have supposedly existed erased from the chart: fitting, since as far as most of America is concerned, there haven’t been any gains at all this decade, only loss.
(click for bigger image)
edit @ 12:30 EDT
The rec list? I think I done died and went to Kossak heaven. Now I feel like I'm in the club. Thank you all, it puts my three hours of spreadsheet fun yesterday to good use.
And now time for my real job. Retail. Ugh.
edit2 @ 16:32 EDT
My god I'm honored by the response. I'll try and write some more for here. If anyone is having any trouble viewing the images, likely the place you are at may block photo services like photobucket (my work does), so you can view all the images at the cross-post here.
Again thank you all so much for reading this. I'm glad to help make some sense of it for people.