The “Great Unraveling” Continues Unabated

Posted by Michael A. Kamperman on August 23, 2009

Christina Romer, the chairperson of President Obama’s Council of Economic Advisers, says “Deficits do matter.” “No one believes that more than the president.”  First we lost the Fed this week and now we lose the President.  For those wondering how to interpret these comments let me translate.  Ms. Romer is saying the President cares more about satisfying the bond vigilantes in China and on Wall Street than he does about whether or not the average American keeps their job or their home.  First the Fed thinks keeping Zombie Banks that don’t go under, but don’t lend either, will eventually work even though it didn’t work in Japan.  Now the President is assuring the balanced budget hawks the federal government is prepared to either raise taxes or slash spending in the middle of the greatest downturn since The Great Depression.  Perhaps he can channel the ghosts of Herbert Hoover and FDR to find out that if they had a chance to do it all over again the last thing they would have done is worry about the deficits until the economy was strong enough to stand on its own.  We are still hemorrhaging jobs and we have significant deflation.  Washington needs a real stimulus plan, needs to fix the broken credit markets, and needs to print a lot more money.  But it is obvious that this will not be happening anytime soon.  Hence, the “Great Unraveling” will continue unabated.

 

The “Great Unraveling” is simply the process of the economic dominoes falling into each other one by one.  A person loses their job, loses their home, and quits spending money at the local clothing store and restaurant.  The local clothing store and restaurant go out of business and the owners default on their mortgages.  These dominoes will continue to fall into each other until something stops them.  In the Great Depression the domino stopper was World War II.  In the Panic of 1873 the domino stopper was time.  In the Japanese Lost Decade the dominos have not stopped falling into each other even though their crisis started 20 years ago.  Do you know a family member or close friend without a job?  Is there a home in your neighborhood that is vacant?  Do you see local businesses closing their doors?  These are the economic dominos that represent the “Great Unraveling.”  That is what a debt-induced deflationary depression is all about.  Those trapped in post World War II inflationary boom bust cycle thinking erroneously believe that the dominos will reverse on their on.  They won’t.

 

Consider that we will enter September with more people unemployed than at anytime since the crisis began.  Consider that we will enter September with more people delinquent on their mortgages than at time since the crisis began.  Consider that those that lost their homes already and those that have been out of work for more than a year are not counted in these statistics.  Consider that state and local governments enter September with lower spending levels and higher taxes than they entered last September.  Consider that most for profit and non-profit institutions enter September with small budgets than they entered last September.  We enter September weaker, not stronger.  The consumer has shown no signs of opening their wallet, except for those with clunkers to unload.  Homebuyers are scarce, except for first time homebuyers taking advantage of the $8,000 tax credit.  To balance the budget the federal government has to end the few kernels of stimulus spending that have actually been working.  However, I would like to suggest a budget cut that will have overwhelming bipartisan support amongst the American people.  Until the unemployment rate is back under 8% as promised, let the President, every senior member of his Administration, and every member of Congress take a 50% pay-cut.  We need to see an end to the “let them eat cake” policies Washington is sending us.