Economic Slowdown,  Recession 2008, and Deflation, The Story

The story is….as the U.S. economy continues to take a downturn many of us are experiencing the effects of the tightening credit by banks and seeing foreclosures in our neighborhoods from home mortgage defaults. In recent months many terms have been used to label the condition of our economy like; economic slowdown, credit crunch, financial crisis, consumer confidence, slump, recession, global slowdown, recovery, falling consumer demand and others. With this being a presidential election year in the U.S., most politicians and economic advisors have been reluctant to admit that our economy was in serious trouble and is now showing signs of depression in October 2008. This downturn began in early 2007 soon after the oil crisis started and gasoline prices skyrocketed from which the oil companies blamed on Hurricane Katrina. Our economy is flexible and can adjust to short term price increases and inflation on its own, but it can not compensate for a 50% increase that is sustained over a year without having penalty. The major oil companies created the gas crisis to challenge the limits of the market price as the price of oil continued to climb higher than the consumer could bear. The majority of consumers have fixed spending budgets and if there are sharp price increases in products they need, such as gas, it creates a shortage of money in the consumer’s wallet. If your budget allows $100 a month for gasoline and now it costs $200, the extra $100 must be made up; if there is no surplus in your budget, something else will be sacrificed. The world’s economy revolves around credit available to businesses and consumers alike and the recent tightening of credit has disabled the purchase of products in the marketplace.

The 2nd contributing factor was the failing of banks and defaulting mortgage companies which caused a home mortgage crisis. Due to the practice of mortgage selloffs, the unregulated lending institutions carelessly gave credit to knowingly under qualified borrowers who were bound to default with any decline in income. The economy is a balanced mix of many factors and when that ratio is interrupted or offset a correction must be made. The players were in position over a year ago feeding the downturn as they are two of the largest cash flow businesses in the world, oil & banking. They both took their turn beating up the American customer on Main Street. The story today is something big has happened and is affecting the economy worldwide, causing a rippling effect around the globe.

The foreign markets are experiencing the same credit crunch as here in the U.S. and because our economy is global. If Uncle Sam has financial problems, the world has problems. Executives of large corporations in America and around the world are concerned about the bank defaults, tightening of credit and the impact of banks cutting back on lending money for working capital to businesses. Companies like Microsoft pleaded to our government to act fast to restore credit monies and support the financial markets. If consumers and businesses alike are not able to get credit, the economic systems stops and deflation will take place. As consumer confidence deteriorates, their spending habits will change from spend to conserve. Business stops expanding, creditors stop lending and consumers stop spending. These conditions can cause an interruption to the flow of money (credit) on the street, which will prolong and deepen the recession.

What is the difference at the consumer level during an inflation period compared to a deflation period? During inflation, the consumer can have debt, even if their income is low they are able to get credit to survive the bad time until their salaries adjust with inflation. During deflation, the consumer who is in debt cannot borrow money or get credit as the lenders stop lending. If the consumer has no backup reserve funds to get thru this period, they are at risk of losing their assets. The economy is very close to entering a deflation phase as credit tightens, unemployment rises and home values continue to drop. The banking bailout is only the tip of the iceberg.

During the 1990’s many homeowners went into debt purchasing new houses and real estate along with other high ticket items. This type of credit spending became the trend and the demand for new higher priced homes and resales rose sharply resulting in price increases that were unrealistic. During this time there was a free flow of credit available from lending institutions and most anyone could qualify for a new mortgage. Homeowners were amazed at the amount their houses were appraised for and the amount of mortgage credit they qualified for. Homeowners decided they had to sell to reap the profits and invest in a new home, little did they understand that this bubble would eventually break and the inflated equity would disappear leaving them with nothing. Everyone felt they were a winner, as a home buyer you could borrow up to 80% of the inflated value of a house, if you were the seller you made a windfall profit with the too good to be true pricing. If you owned a home and weren’t interested in selling, you tapped the inflated equity in your home as it became your Dream Come True ATM Machine. When we think back about the past 10 years it was a fantasy - like economy and we were numb to high prices because of the unlimited credit available. The home equity loan or line of credit was used to pay for - cars, 2^nd properties, vacations, cruises, home improvements, college tuition, weddings and other luxuries.

Facing Deflation

Deflation is caused when a combination of economic events occur in the economy like a tightening of credit and major failures in the markets months before. Deflation has never occurred during our baby boomer years and the majority of the income generating population has no idea of what to expect nor do they realize how serious the situation is. There are only two recorded deflation eras from the past, in 1835 to 1842 and again in 1929 to 1932, both of which followed major credit expansion periods. Japan experienced a similar deflation economy during the 1980’s which took almost 10 years to recover. Different than recessions in the past, this will hit close to home affecting families and friends of many of us as the effects will be swift. 

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Baby Boomers Home Equity Retirement

As this generation heads into retirement, the picture of the American homestead is going to drastically change its face. The keywords here are change and adapt to the new economic trends the boomers will set, just as they have in the past 50 years. This shifting of generations is already creating major economic events in our housing outlook and retirement planning. The current slump in our housing market is not temporary and doesn’t necessarily have all to do with interest rates or the employment rate. The change of generational habits, wants and needs is now taking place and we must adapt as home values and equity slide downward.

The baby boomer generation has been steering the prices of real estate for over 40 years and they broke the traditional mold of what they want as home buyers. The boomers massive buying power usually drives the way American companies market their products to sell to them. The building industry listened to the call and produced homes to fit the boomers wants and they must listen again to the changing buyers needs in their senior years. In the past this generation has created the demand for bigger houses and set the pace for the average family to own 2 - 3 houses during their lifetime, compared to most of our parents having only 1 home in their life span. It is hard to predict if the boomers are really ready to downsize to new smaller homes or retirement centers, but you can bet whatever trend they choose will become popular by many. There is not much we can do to stop what is coming our way as the boomers plan retirement. Some will stay in their existing homes, but the majority will downsize or require assisted living residences.

For those of us looking to stay in our existing houses, we need to be prepared for the price of our properties to trickle downward. The fact is it will be a buyers market for years to come. Some professionals are estimating there will be 3 homes for sale for every buyer, this translates to lower prices and a surplus of larger houses in the real estate market. The generations behind us are struggling to save and buy townhomes or starter homes and can’t qualify for jumbo mortgages as we did in the past. I think there is another trend going on in many households, it is the return of their children after college and some returning married with kids of their own. The baby boomers may have no choice other than to take in their children or possibly their parents, living with them under one roof because of the high cost of living in the metropolitan suburbs.

Retirement  Income. Our parents, different than we, did not count on the equity value of a house to be part of their retirement income, they saved that asset in case of emergency and most of the time for their children’s inheritance. A majority of baby boomers on the other hand, have planned to use this equity for a large portion of their retirement fund and this is where boomers are going to fall short as home values decrease and equity lessens. The cost of maintaining a large home, taxes and healthcare will be higher than retirees income and maybe the boomers will need the financial help of their live in children and families to survive. So maybe your kids moving back home won’t be so bad after all, they will probably be paying part of your living expenses and will inherit the house in the long run. That’s better than selling the house to put you into assisted living somewhere else.

Gas Crisis 35 Years Later.. No Difference - Who Remembers..

The plans for the first gas crisis started in August of 1973 as the Arab Nations would prepare for war with Israel. On October 17, 1973 the OAPEC (Organization of Arab Petroleum Exporting Countries) who were the Arab members of OPEC (Organization of Petroleum Exporting Countries) announced they would no longer ship oil to countries that supported Israel, like the United States. Around this time OPEC members agreed to use their power over the world and become the world price setting instrument to raise the prices of oil throughout the world. OPEC cut production of oil and placed an embargo on all deliveries of crude oil to the Western world, including the United States and the Netherlands. Not many Americans really understood what was happening to our economy as most  thought that the oil companies were U.S. owned, very few people realized then that we no longer were a super power of oil production but rather a crude oil whore that sold out long ago. Little did we know this was the beginning of the end of an important segment in the American lifestyle as we knew of in the past. This would be the start of a major change in the U.S. automobile market and ripple through our economy to affect all Americans in ways that could not be imagined. This opened America’s front door to a new wave of imported vehicles and left the U.S. auto manufacturers watching the compact cars drive by their showrooms as they could not change their traditional ways of production fast enough to produce higher MPG vehicles. The new generation of auto buyers who were part of the baby boomer generation got pleasure from going against the U.S. establishment and purchased foreign autos and mocked America along the way, what they didn’t understand was that they were putting their brothers & fathers and eventually themselves in the unemployment line contributing to the loss of many American jobs. Needless to say we faced a recession that was a start of things to come for many years ahead.

Gas Crisis of 2005-2008….

If you can remember the date of about August 23, 2005 on a typical summer day the headline news reports were warning of a large tropical storm approaching the Gulf of Mexico.  This tropical storm would strengthen to be named -   Hurricane Katrina, and on August 29th Katrina would slam the Gulf of Mexico and surrounding coastal areas. After the hurricane was over there would be some damage to offshore oil drilling rigs in the Gulf. The oil companies who owned these rigs would blame Hurricane Katrina and Mother Nature for the next record setting $$$price increase of oil products in our history. After all a gouging price increase was long overdue for the oil companies and this was the perfect time to make windfall profits as they did in the 70’s and this storm would give an opportunity to test how much the American economy could bear.  If you remember the first news reports during Katrina reported that oil production suffered slightly and these oil stations produced only 8-10% of our demand and at that time prices and supply was of no concern. Well within a few days after the storms passed, the oil companies kept raising the percentage of our dependence on these couple of damaged rigs. When said and done the companies claimed that these drilling rigs were producing 25% or more of our oil demand and the U.S. needed every drop of that oil and we would face a serious shortage immediately until new sources were found and repairs were made. As in 1973, the owners of the oil companies would prove again to us who really owns the oil world and they would take down the American economy by raising prices until a recession would cripple us again.

Here’s what happened - Oil prices were relatively below $25/barrel in September 2003. Many small events would raise the prices gradually to reach over $60/barrel by August 11,2005, exceed $75 in the summer of 2006, fall to between $50 and $60/barrel in the early part of 2007, drastically rise, reaching $92/barrel by October 2007 and $99/barrel for December. On February 19, 2008, oil prices hit an all-time peak at $100.10 per barrel. So here we go again on a ride for survival on the oil barons cruise boat waiting to be dropped off deep in the ocean wherever or whenever they choose. We will pay for the increase in oil prices in every product and service we purchase and in our own daily travel expenses. So you ask are we being raped? Of course, and there is nothing we can do about it until our nation realizes that oil is a has been fuel and the supply will continue to drain down and prices will increase. We have been in this gas crisis for over 35 years, and we kept closing our eyes to not see reality. The rest of the world laughs at the U.S. when we cry about gasoline prices, because they are also being raped for the price of gas. America loves those big gas-guzzling pickup trucks & SUV’s and here we go again as in the 1970’s blaming car manufacturers about why they haven’t done something about more fuel efficient vehicles. It would be embarrassing for an American to own a Hummer with an electric engine. And all of the imports manufacturers have joined in with fuel thirsty suv’s and pickups. Any American who wanted a car that could get at least 30 miles per gallon could have done so in the last two decades. But year after year, according to U.S. automotive sales histories, those cars were at the bottom of the market regardless of whether they came from Japan, the United States or Europe. Remember, OPEC will not come to the rescue. Wars & U.S. Military action on the soil of oil producing countries will not solve the problem. The only solution is to lower our use and dependence of oil fuels because they are depleting faster than can be harvested. No amount of money or drilling fields can solve the problem, only alternative fuel is the answer and we are becoming the prime targets for paying the high costs of exploration of new fuel substitutes. And I am sure we (Americans) can find the means and methods to develop new fuels before our fellow auto importers do, and I am sure we will sell out again to a foreign manufacturers.

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The Recession 2008 is nearing the peak and will drag into 2009 mid year. The global economy is continuing to weaken as the stock market is very volatile in the past weeks as the bail out may not save the crisis from getting worse in the housing market credit crunch. American jobs are at risk with employees losing their job as the unemployment rate continues to go up and homeowners are behind on their mortgage payments which will increase the amount of foreclosure. The bank foreclosures and insurance crash in companies like Aig is not helping funds for mortgage loans and the bank defaults continue in the U.S. economy deepening the  depression. Consumer spending is down in all markets of global retail sales including the  foreign markets because of the economic slowdown. The word on Wall Street is optimistic as the  s-p 500 and job reports according to Bernanke and Greenspan. The central bank is trying to boost consumer confidence to help recover from the financial crisis which started from the gas crisis and eventually hit the job market causing unemployment and the  jobless rate to skyrocket. Unemployment  claims are not as high as in the great depression but house prices continue to drop and interest on credit cards are rising by the lending institutions. The fall of 2008 will mark the start of deflation and inflation may continue as the price of Gold prices is not stable. The Dow jones industrial average, Vix, Nyse and Amex are listed commodities as a good investment investing in bonds with a high interest rate and investments with interest rates above average.

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