We are Living Through “The Great Unraveling”
Posted by Michael A. Kamperman on August 18, 2009
Many describe the state of our current economic malaise as The Great Recession. Others have used more dire terms like The Second Great Depression, The New Great Depression, or The Great Depression 2.0. But these labels are simply attempts to measure the severity of the global economic collapse to compare it to past economic crisis. Since the economy has not yet recovered, no one can say with certainty how deep the global economic contraction will ultimately be. It is no secret I am firmly in the New Great Depression camp. But I have been thinking we need a new term that describes what the economy is going through, rather than one that just measures how low we ultimately go. Therefore, I am coining the phrase “The Great Unraveling” to describe the economic calamity we are living through. By understanding what we are experiencing it can help people calculate on their own how much further we may have to fall before we reach bottom. The misnomer The Great Recession has many analysts getting out their charts of previous recessions in attempts to predict when this so called recession will end. However, what we are experiencing is not similar to any of the post World War II inflationary era recessions.
“The Great Unraveling” is a term that describes the process the global economy is now working through. This process will continue until it has run its course and the untangling and unraveling of a global economy that has relied on too much debt is completed. Excessive mortgage lending in the U.S and most of the rest of the developed world led to a significant rise in real estate prices. For example, pedestrian 1,000 square foot apartments in New York (Manhattan), London, Paris, and Tokyo started selling for over $1 million and 2,000 square foot 30 year old ranch houses in Southern California that were not near the beach began selling for over $500,000, despite the fact the houses were located in middle class neighborhoods. When there weren’t enough legitimate borrowers left to keep the bubble going, the standards for mortgage lending fell all the way to outright fraud with no money down loans for the purchase of these properties given to unemployed people with bad credit. When the credit rating agencies stamped over 90% of pools of these loans AAA they killed the shadow banking system that supplied almost 75% of the nations credit needs. Hence, our economy is left without the ability to use the house as an ATM machine. The economy will continue to contract as long as the consumer is forced to restore their balance sheet and their access to credit remains tight. We are living through the greatest unwinding of a bubble since the Dutch Tulip bubble. Most of the imbalances of the global economy will be brought back into balance before economic growth resumes.
Proof that debt is still unwinding came from a recent federal government report that loan balances at the 22 largest recipients of TARP funds fell by $45 billion in the month of June. The money supply is still contracting. It took 20 years after the oft forgotten debt induced Panic of 1873 for the global economies to resume strong growth in the 1890’s. It took the start of World War II to catapult the global economies out of the Great Depression of the 1930’s 10 years after it began. If we continue to adopt the Washington strategy of watchful waiting it could take 10 to 20 years before the debt induced deflationary depression we have entered finishes unraveling on its own. It could take longer and civil society could begin to come apart at the seams in the interim. I remain an advocate of shock and awe quantitative easing to stop the otherwise inevitable Great debt Unraveling in its tracks.
