Saturday, January 17, 2009

Could Be A Lot Worse. WAS A Lot Worse in 1980s.

Consider the following comparisons of key economic variables today to the peaks for those variable in the early 1980s (see graph above):

Prime Rate
1981: 20.5%
2009: 3.25% (Current)

Inflation
1980: 14.8%
2008: 0% (December)

Unemployment Rate
1982: 10.8%
2008: 7.2% (December)

30-Year Mortgage Rate
1981: 18.5%
2009: 4.96% (Current)

Real Gas Price (2008 dollars)
1981:
$3.45 per gallon
2009: $1.82 (Current)

Bottom Line: When it comes to the current state of the economy, it could be a lot worse. It WAS a lot worse in the early 1980s, by the five key economic variables above: prime rate, inflation, jobless rate, 30-year mortgage rate and real gas prices.

19 Comments:

At 1/17/2009 8:14 PM, Blogger PeakTrader said...

The real U.S. economy has generally been ignored, including an "overabundance" of real assets and goods, that raised household living standards at a steeper rate, substantially greater efficiencies of firms, in producing more output with fewer inputs, and the government borrowing almost for free.

Moreover, the assumption is Bush hasn't been a fiscal conservative. However, his major problems arise from being too fiscally conservative, including fighting cheap wars and not spending enough or cutting taxes further during the financial crisis.

It's amazing there were enormous real improvements in the U.S. economy, that were greater than the 1990s, during a structural bear market that began in 2000, after the spectacular structural bull market from 1982-00, and these improvements have largely been ignored.

 
At 1/17/2009 8:36 PM, Anonymous Mycroft said...

As much as I like to stay positive, especially since I am employed in the financial services industry, it's not about the historical economic indicators, is it?

The spiral that we are in resulting in deflating asset values that are a result of our reckless consumption over the last 30 years promises to make this much worse than where we are now. Could be a lot worse? Yes, yes it could. Just wait.

 
At 1/17/2009 8:47 PM, Blogger PeakTrader said...

Mycroft, I wouldn't say "reckless consumption." It's rational consumption. Just like the volume of output in itself will cause declining prices and induce demand, the volume of capital will in itself cause interest rates to fall and induce demand.

Also, I may add, high debt levels and low savings will cause Americans to work longer, and postpone retirements, which will add to future economic growth.

 
At 1/17/2009 11:03 PM, Blogger QT said...

Peak Trader,

It will also be interesting to see whether the present policies of record breaking public spending and low interest rates will create runaway inflation.

I agree with you that the underlying economy of the U.S. is a great deal stronger than we hear and that companies have become far more productive and energy efficient in the last 20 years. The present downturn will shake out any weaker players like Nortel Networks and Chrysler resulting in a stronger economy.

Not to minimize the problems roiling the global economy however, we will get through it just like the Asian crisis, & Stagflation.

The San Francisco democrats have the kahn..is it really surprising that we hear that America is internationally disgraced, morally bankrupt, socially inequitable, profiligate, and economically DOA? Let's see how the Messiah does...

 
At 1/18/2009 12:07 AM, Blogger PeakTrader said...

QT, the question is when the economic expansion is underway, will the Fed absorb excess dollars fast enough.

I agree, U.S. producers have become substantially more energy efficient in the 2000s. U.S. multinationals offshored obsolete or high cost goods (e.g. heavy goods) for big profits, rather than discontinue operations of those goods, and then imported those goods at lower prices. Freed-up limited resources were shifted into emerging industries and into "core" goods of older industries with market power. U.S. production has become lighter. Many goods the U.S. produces weigh almost nothing. The U.S. leads the rest of the world combined in Information Age and Biotech Revolution firms in both revenues and profits. However, on the consumption side, the U.S. is less energy efficient, because Americans live in bigger, better, and newer houses, drive bigger, better, and newer autos, etc.

 
At 1/18/2009 12:53 AM, Anonymous poor boomer said...

Difference is, an unskilled baby boomer had a much easier time finding a job in 1980 than in 2008, and may well be unemployable today.

 
At 1/18/2009 2:28 PM, Anonymous Anonymous said...

Several antidotes for the optimists:

1. US household net worth in 2008 declines (probably the largest decline ever reported when the Q4 stats are published) but net worth rose in 1981.

2. 2008 mortgage foreclosures/delinquencies are higher than in 1981.

3. Homeowner equity in 2008 is 23 percentage points lower than in 1981.

 
At 1/18/2009 4:37 PM, Anonymous Mycroft said...

Anonymous,

This is my point. "Rational consupmtion" as experienced in recent years is only rational in an environment with steadily increasing asset values. As a lender to middle market businesses owned by PE firms, I have watched with amazment since 2002 as the values of these businesses traded hands at higher and higher valuations based on nothing more than higher leverage multiples. The higher debt levels allowed for hogher valuations, which gave lenders more confidence in their ability to lend safely. I also witnessed underwriting standards on the commercial side that were similar to those of the consumer market.

I am witnessing, first hand, the grinding halt of commercial lending activity. And it is ugly. I have lived through a number of these cycles and have never seen anything like this. Peak Trader and QT, I would not view this like any other recession that any of us have experienced in our lifetimes.

PT, your comment about capital is only valid if it is flowing. Take a look at the TED spread over the last few months. While the federal government was flooding the economy with cash, banks hoarded their money, not sure which other banks were credit worthy, driving the LIBOR rate through the roof. Watch it happen again as doubts about the strength of Citi and BofA persist.

Make no mistake, I hope I am wrong. But I don't think so.

 
At 1/18/2009 5:00 PM, Blogger PeakTrader said...

U.S. output was $14.5 trillion last year, and U.S. income over the next 10 years will be more than $160 trillion. The U.S. with less than 5% of the world's population produces about 30% of the world's output. Also, U.S. goods have market power and improved terms-of-trade. Recent deflation, and disinflation in the '80s to '00s, is a result of excess real assets and goods. There are too many houses, too many autos, too many imports, etc. So, prices and interest rates fall to clear the market of excess assets and goods.

The overextended U.S. homebuilding boom began in 1995. Millions of U.S. homeowners extracted trillions of dollars in home equity, most of it for home improvements and related goods. It was a substantial increase in real U.S. wealth. Recently, home prices and mortgage rates fell, which is causing another refinancing boom to lower monthly housing payments further, and increase future U.S. income for other goods. U.S. capital creation and massive foreign capital inflows represent real wealth.

Throughout the 2000s, there was a tremendous shift of real wealth from savers, including foreigners, to borrowers, including lower income Americans, which raised absolute U.S. living standards and created substantial U.S. upward mobility. Export-led economies, e.g. China, are almost broke, because it has been working hard almost for free (when social costs are included). Japan is another example, which works hard for small and expensive houses, small and expensive autos, small and expensive imports, etc.

 
At 1/18/2009 5:25 PM, Blogger QT said...

Mycroft,

Leverage has definitely been significant factor in the credit crisis and deleveraging is generally painful but necessary. TED spread and LIBOR both indicate a freezing up of credit and areas of continued concern in spite of the actions by the Fed and Treasury.

In Canada during recessions, our banks generally turn the credit spigott off. Those of us who have dealt with banks have had terms of loans changed or faced foreclosure without warning even when financial obligations are being met. The dominant position of banks reflects a lack of competition in Canada.

Those of us who have been through grinding recessions before know that cash is king in a recession. Companies with strong balance sheets (ie. a strong cash position) survive while those with loans and obligations go under.


Anon.,

The standard in 1981 was 20% deposit & 80% morgage not 0% - 5% deposit and the rest mortgaged. Unless your analysis is able to exclude loans with less than a 20% deposit, you are comparing apples to rhutabegas.

It is doubtful that you have ever experienced a 18.5% morgage. Using excel you can work out a mortgage schedule and then you can calculate the before tax earning required to support the after tax payments. Unless you do the math, you really don't understand what some of us lived through or why having lived through such hardships why some of us might feel just a tad optimistic at the present low mortgage rates.

I will however remind you of one reality. The raising of interest rates which by 1980s standards was a modest increase led to ARMS resetting at rates which were unaffordable causing the bubble in the housing market to burst. If interest rates were so benign and innocuous, how would this have been possible?

 
At 1/18/2009 5:33 PM, Blogger Anthony Teamson said...

The comparisons used in this post are irrelevant. Comparing 1980 to 2009 is farcical. 1980 was the mature stage of the Johnson/Nixon guns and butter spending; Nixon's complete abrogation of the Bretton Woods Accord and subsequent commodity inflation coupled with OPEC's oil shock. Other then the financial sector melt down the US economy has not even begun to reflect the impact of the real estate, retail, and auto industry implosions. It is asinine to assume that unlimited government spending; astronomical debt limits and irresponsible expansion of the money supply will lead to a rebound and prosperity. PeakTrader's statements are false. There was no "...raised household living standard." Real wages adjusted for inflation fell and the acquisition of material goods was accomplished through debt. His additional claptrap of "Also, I may add, high debt levels and low savings will cause Americans to work longer, and postpone retirements, which will add to future economic growth." itself contradicts his prior assertions. Now, it is in PeakTraders interest to assert inflating the economy through massive debt is productivity because debt induced increases in stock indexes provide him with an income. Additionally, there were no "...enormous real improvements in the US economy..., if there were: a fall in home sales would not have caused such financial trauma. I sense what we really have is a displaced Bush Republican using a declarative writing style, and Wall Street nomenclature to turn fiction into fact. Oh, yes, there really were weapons on mass destruction in Iraq.

 
At 1/18/2009 7:22 PM, Anonymous poor boomer said...

Mycroft said:

"This is my point. "Rational consupmtion" as experienced in recent years is only rational in an environment with steadily increasing asset values."


By your standards, it sounds like any consumption by zero-asset holders is not rational.

Surely that can't be rational.

 
At 1/18/2009 7:53 PM, Blogger PeakTrader said...

Anthony Teamson, actually, your entire statement is "a declarative writing style," not supported by economics. I'd like to see you actually prove any of my statements are false.

 
At 1/18/2009 8:52 PM, Anonymous Mycroft said...

Poor Boomer,

My statement was a response to Peak Trader's reply to my "reckless consumption" comment earlier. Of course I don't think that any consumption is dependent on increasing asset values. However, increasing asset values make those holding the asset much more likely to consume. That was my original point.

QT,

You made my point for me. Of course "cash is king". Unfortunately, virtually all businesses in the US utilize debt in some form or fashion. What makes this recession so different than in the past is that even strong companies with AAA rated balanace sheets have had trouble getting commercial paper and working capital lines of credit. These are the lifeblood of day to day operations of a business. Without them, the businesses will shut down in matter of weeks. Don't you find it telling that companies such as GE Capital were so willing to fund long term loans with 90 CP issuances? This goes against the fundamental lessons of credit 101 but the relaince on the Federal Reserve system to continue to engineer soft landings led to an irrational belief that they could mismatch assets and liabilities and were running very litte risk.

 
At 1/18/2009 9:05 PM, Blogger bix1951 said...

Methinks they doth protest too much.

"There will be growth in the spring.
Chauncy Gardner

 
At 1/18/2009 9:22 PM, Blogger Mycroft - www.fed45.blogspot.com said...

bix1951,

If you mean of the vegetal variety, you are right!

 
At 1/19/2009 11:27 PM, Blogger QT said...

Anon.,

When you pay in full for your home twice over, then I trust you will be in a posish to comment about the 1980s. Condescention no...just been around the block a couple of times.

Interesting isn't it that you cannot address the substance of my counter argument namely, you are unable to strip out foreclosures with deposits less than 20% of the value of the home to compare apples to apples. Subprime loans did not exist in the 1980s as we all know.

Isn't it pathetic when namecalling is your only ammo? Is that it? Am I supposed to be impressed, devastated, persuaded, intimidated...or even awake.

In the words of William F. Buckley:

"I won't insult your intelligence by suggesting that you really believe what you just said"

You have made a claim and I have countered it and you have been unable to refute the counter-argument with any semblance of a reasoned argument. Your only refuge is outrage than anyone should dare to question you. When did you leave grade school.

This is not a popularity contest or handholding with your mom. When you present a claim in argumentation, you have to be prepared to substantiate the claim and to counter arguments.

Yes, you're right I am condescending to anyone with a university education who cannot debate a simple question without having tantrum worthy of a 2 year old.

Address the argument and forget your personal likes and dislikes. Get on with it or stop wasting my time.

 
At 1/20/2009 2:25 PM, Blogger NoWhining said...

This comment has been removed by the author.

 
At 1/20/2009 6:52 PM, Anonymous TheFixedPie said...

I relayed your post onto my blog. Thanks.

 

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