A Long Time Before Investors Will Gamble on Housing Debt

In the first place, the rally in stocks is likely to be a bear market trap. A real boom would require a real increase in profits. That is not likely to happen. Housing prices may be nearing a bottom – or not – but they’re not likely to begin another huge rise again in our lifetimes. Once a bubble pops…it’s usually over for that sector at least until another generation comes along. It will be a long time before homeowners forget what happened to their house prices. And it will be a long time before investors are willing to make big gambles on housing debt.

It will also be a long time before Americans return to free-spending ways. Not only do they no longer have the collateral to back up more debt, they are also growing older and wiser. Consumer spending rose 2.2% in the last quarter. But that is probably a fluke. Americans can’t spend what they don’t have. And they must save for long retirements…knowing that their houses and stocks could lose value at any time.

The last report we saw showed the saving rate was back towards 5% – a big jump up from zero a year ago. There is no way savings AND spending can go up at the same time.

What’s more, their incomes are falling. Wages and salaries are down 1.2% over the last year. As this depression sinks in…Americans will lose more income.

USA Today opens with a cover story on “the new homeless.” There’s a photo of a 53-year-old man sitting in his tent. It’s a “temporary situation,” he says. But the tent city in Pinellas County, Florida, may be home for longer than he expects.

“Tent cities filling up with casualties of the economy,’ says the headline. “Some middle-class workers with college degrees find themselves displaced by layoffs, foreclosures.”

“Economy contracts ‘faster than in the 1930s,'” says a headline in today’s Financial Times. A research outfit is forecasting a drop in British national income of 4.3% – substantially worse than the government’s guess. The reason for this new outlook is that “world trade has collapsed by more than forecast,” explained an economist on the case. The report went on to forecast UK public debt at 100% of GDP.

The story is not much different in the United States. GDP is falling at a 6% annual rate. If this continues for a few years, it will make this depression worse than the Great Depression of the ’30s – which hit America much harder than it did Britain (probably thanks to the forceful response of the Hoover and Roosevelt administrations).

Equity losses last year were worse than those of ’29. It stands to reason that the next phase – the economic decline – will also be worse than the ’30s.

By our calculation, the U.S. economy carries about $20 trillion of excess debt. Until that debt is eliminated, the idea of a healthy boom is a mirage. Getting rid of that debt either involves a long, hard period of work and sacrifice – as debts are paid down. Or, it involves something much worse.

Our guess is that the feds – who still have no idea what is going on – will choose the second solution…something much worse.

But what, exactly? We have some ideas…some guesses…stay tuned.

Until tomorrow,

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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