Feb 15, 201112:00 AMMad @ Mgmt
with Walter Simson
What Year Is This?
Not 1929, the year that the Wall Street crash signaled the beginning of the depression. 1939 – after nearly 10 years of faithful payments on the family's sole investment.
It was a small three bedroom Tudor-style house with an oak tree the family planted upon moving in. It had housed a family of five until my father went off to college. It was 90% paid off at the time of foreclosure.
When the house was lost, my father lost his chance at college. He came to the new family home, a cold-water flat in a not-so-nice neighborhood, and got a job as a messenger.
This story haunts me because it happened 10 years into the depression. One can only imagine that the family had thought they had bested the bad times, keeping payments up on the house and all. Certainly, it is hard to imagine that during the 10 years the family would have contemplated losing the house. But the depression lasted longer, with more ups and downs than they imagined.
We had our crash in 2008, with the failure of investment institutions and the announcement of a financial rescue plan even as the government had a hard time articulating the cause or effects of the crash.
So now, in 2011, what year are we in? Are we in a safe and secure post-crash recovery, or are we bouncing around, just waiting for our 1939 to cause disaster?
To answer the question, I searched on the internet for graphs on long term economic trends. Let's see what year the economic data of today most resemble. Since I looked at graphs, I don't precisely know that the stats and these are generalizations. Take a look here for an idea of all this data in one place.
- Housing starts – 587,600 in 2010. The average for the prior 20 years was 1.5 million. The last 50 years saw a low of 843,000.
- Home prices. The index of 115 is the same as about 2002 – just as we were coming off the post 9-11 shock.
- Capacity utilization. How busy are our factories? About 77%, same as 2002 and 1984 – both recovery years.
- Inflation. Consumer prices as calculated by the labor department (they will reflect lower rent costs, even though almost no one is paying lower rents): 1.1%. Same as 1955-56.
- GNP – well, it looks like 2007. That means GNP per capita is probably more like the late 1990s, due to population increase.
- How are our exports? Fifteen percent, same as 2009 and 1958, both recession years.
- Cost of natural gas. ($mBTU) $4 – the same as 2003.
- The savings rate is about 5%, about the same as 1995. The current trend is up, and the trend in the '90s, as we now know, was headed to zero.
- Employees in the United States appear to total about 130 million. This is the same as 1996. The resulting unemployment rate of about 9% was last seen in the 1981 recession.
- The government deficit as a percent of GDP is about 8.9%. This is the same as 2009, and before that the graph hits that level in 1945.
- The Dow Jones average of 30 industrial stocks was at the level of 12,000 in 2007 – on the way up to 14,000 before the crash.
What's my conclusion? I think we have the continued fallout of years of overinvestment in the wrong things and underinvestment in the right things. Wrong things were big houses, the right things productive capacity. The lack of demand is shocking. (Developed economies are not supposed to give back 15 years of prosperity at one shot.) So the government deficit is going to stay high for a while, I predict.
The simple math is that if the government deficit is reduced by 4 percentage points to equal what it was (as a percent of GDP) in 1986, the reduction would cause almost a dollar-for-dollar reduction in GDP.
That puts us back in recession. Some more of us could lose our houses. We could go back to 1939.
However, if we do not make medium term (say 3-5 years) plans to reduce the deficit, the international markets could decide to reduce it for us. And then we definitely replay some very bad years.
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