The Coming Economic Depression

I just want to see how much people know about this before I go posting different things. Anybody heard about the economic troubles our country is undergoing? The underlying problems, like Fannie Mae and Freddie Mac? Derivative failures these two giants would create if people can’t pay their mortgages and how many banks, big businesses and so on? If other countries stop buying up our debt because inflation is greater than the yields? Anybody know about these things?

Are you talking about the real estate bubble and inevitable correction of the market? Or, um, something else?


Considering your posting so far, I think it’s pretty safe to assume most people don’t share the knowledge that you have.

Weeeell, somewhat. It’s a little to do with that, and a little more to do with all the other things in our economy. Job losses means less people paying their mortgages. Less people paying their mortgages means more Fannie Mae and Freddie Mac fudging their numbers so they don’t have to report their losses so they don’t go bankrupt like Enron and take many, many more major companies with them in a big snowball effect. When our market corrects it’s going to hurt real bad.

I’m also talking about the foreign nations that aren’t buying up our treasuries like they used to, so the effects this will have on our dollar. The hedge fund industry, the massive rise in M3, how the Fed is choosing to not publish M3 statistics anymore, and how it seems as if we got some money laundering going on to prop up our currency with the absence of investors. Man, just so much going on.

I, for one, think that there is a big problem. Kinda an Emperor’s New Clothes kinda thing.

It’s been going on for the last 5-10 years. There is always the potential that something will trigger such a scenario. The problems are there. But so far nothing has triggered it.

I personally think that something will. I just don’t know when. While the American economy has an amazing ability to survive, if and when a critical mass of people in the world decide to bail, stand back. It’ll all be over but the shouting.

As an example. If China decided to redeem say, 40% of the US dollars that they hold, it would probably put the value of the US dollar into free-fall against most world currencies. It would be cataclysmic.

Seemingly unsustainable economic situations can go on for a lot longer than one might think. While I can list a number of dark clouds for the US economy in addition to the ones listed above - think about the alternatives - the EU has some serious economic problems of its own, high unemployment, problematic demographics etc… China is the economic powerhouse du jour, but their growth will not be without a few hiccups along the way - and without the mature economic infrastructure the West has installed. Their banking system in particular is awfully hinky.

Well, yeah, but that would be cataclysmic for China, too. Who would buy their stuff if the US goes belly-up? So China has an interest in keeping us afloat.

It sure would. I think the only saving feature is that we all have the same rope around our necks and that rope is tied to the same big stone. Because of the size of the US economy it really wouldn’t be to the advantage of China, or anyone else, to suddenly wreck the US economy.

I hope.

I was thinking the same thing.

And I’ve always wondered what would happen if the US just said “we aren’t paying!”

China, for example would still need the US markets to sell to, wouldn’t they? Sure they’d be upset… but what would really happen if the US defaulted?

Or, maybe an economist out there could help us. Is there a point at which if the US passes debt-wise, a bubble could truly burst and the world could collapse into another depression?

For about 15 years now the Japanese economy has been on the verge of (take your pick) collapse or recovery.

The latest story is “recovery.”

I think the US economy is basically in a stagnant, slow-growth mode that is going to continue in this vein for another 10 to 20 years. In their respective times, both the S&L meltdown and 9/11 created (or helped to create) malaise and recession, but not a depression. I don’t think it’s going to happen.

Consider also this sobering fact:


At some point in 1965: 874

At some point in 1981: 875

For 16 years we had total stagnation in the DJIA (actually, there were periods in between when it was a lot worse, a only a few in which it was better).

The US would be unable to sell debt at a good price, which would majorly f*up the budget/accounting/cash flow of the government.

At the same time, the value of the dollar would drop like a stone. Japanese and Chinese imports would become dramatically more expensive, and the economies of those two countries, reliant on exports as they are, would suffer big pain.

The US will never default on its debt; the interest payments just aren’t that hard to make. What is the more likely scenario is that China and Japan can no longer afford or choose not to prop up the dollar by buying US government securities.

Check out The Long Emergency, by James Howard Kunstler; it deals with all these issues, and more.

You might also want to peruse Kunstler’s website.

Big pain indeed – but remember, the U.S. is not their only export market. They can still sell plenty to Europe and Latin America and maybe India.

If you mean the U.S. government defaulting on foreign-owned federal bonds and T-bills – if that happens, foreigners won’t buy any more of them and our government goes bankrupt, or as near to bankrupt as a national government can.

My question is whether our banking industry might be a house of cards on the verge of collapse. I see several factors converging which cause me concern, but don’t know enough about economics to know how these things will play out:

  1. Personal debt is at very high levels. Credit cards are maxed out for many.

  2. Interest rates are rising.

  3. The real estate markets are softening.

  4. Home values are beginning to drop.

  5. The combination of 2, 3, and 4 means that consumers who are deep in credit card debt can no longer bail themselves out by refinancing their homes or taking a second mortgage.

  6. New credit card laws mean that consumers have higher minimum payments to make, stretching their budgets thinner.

  7. At the worst possible time, gasoline prices have gone through the roof, punching another large hole in the budget of anyone who commutes, or who must drive from job-to-job. Moreover, the inflationary pressure from high gasoline prices will only compound the consumer’s woes.

  8. Baby boomers are beginning to retire, meaning it is likely a lot of real estate is about to come on the market, as boomers sell their primary residences and make plans to move to smaller homes or second homes. That will only make prices drop lower and home equity shrink further for the rest of us.

  9. A lot of people are going to find themselves “upside down,” that is, owing more on their home than the home is worth. (A lot of people are already there.)

Now let’s put that all together. Let’s say I am Joe Consumer. My credit card debt is through the roof. Gas bills, and the resulting inflation aren’t helping my situation. As interest on my debt compounds (at ridiculously high credit card rates), I reach the point where I can’t make payments. And then I also begin to slip behind on the mortgage.

Here’s where I would like to refinance my house, just to consolidate my debts and catch my breath. But I can’t do that because my equity has vanished in the falling real estate market.

Now the bank is threatening me with foreclosure, and I’m thinking I’ll either file for bankruptcy, or else I’ll just let the bank have the house. (What the hell? I don’t have any equity anyway.)

When all this happens, multiplied many times, the banks begin to bleed. Profusely. Credit card debt is getting erased, or partly erased, in bankruptcy court, so the banks are losing money there. And banks are foreclosing on properties that won’t sell because the market is glutted. So they are eating mortgages.

If all this happens it seems to me that banks are in trouble.

Not only that, but people are so bound up with debt that they stop spending. The economy slows to a crawl. (In the past, bankruptcy would have cut off consumer debts and freed consumers to spend again; but the tough new bankruptcy laws recently enacted by Congress mean consumers may find themselves still shackled to at least part of their debt.)

So now employers have to start laying people off, because the latest doodads just aren’t selling any more. And now, I, Joe Consumer have lost my job.

What am I getting wrong? Am I mistaken about any of the trends I am seeing? Am I mistaken about potential consequences? Would someone versed in economics please tell me I am mistaken, and give me a happy ending?

I guess that being American, you all tend to see America’s economic problems as the big disaster in waiting, but in fact, America’s fundamentals are among the best in the world.

You take America’s upcoming problem with Medicare Social Security, multiple it by about a factor of five, and you have the scale of the problem facing Europe over the same issue.

Europe is where the trouble is going to come from, if it comes at all. High debts, serious population issues, overly-generous public benefits, restrictive work rules, and an Economic Union that is distorted and which is causing all kinds of problems that will only get worse.

Plus, although Europe is slow to awaken to it, the problem of Islamic terrorism and fundamentalism is much more serious in Europe.

Are we headed for an economic depression or recession?

Absolutely. We are guaranteed to have the economy head south at some point in the future. Probably not to long in the future. We will almost certainly experience an economic downturn within 10 years, more likely sooner.

And once we hit this downturn, will the US become a third world country?

No, of course not. We’ve had some major economic downturns in the last 80 years since the great depression. Anyone who predicts unending growth from now until the Second Coming is an idiot. Likewise, anyone who predicts that an economic collapse will mean The Ruin of America is an idiot.

The real estate bubble will collapse, the banking industry will be ravaged, consumer spending will plunge, business will contract, employers will start layoffs, consumer spending plunges further, and on and on. This is the cause of recessions and depressions, positive feedback cycles in the economy. But those positive feedback cycles don’t mean our economy spirals down into subsistence agriculture and knapping stone knives to slice up our neighbor’s bodies for their valuable calories.

Think about the dot com bubble. When the bubble burst, lots of people found themselves out of their job selling pet food over the internet. But many people were doing work which HAD NO VALUE. The jobs they were doing weren’t worth doing. A competant computer programmer has value, but if the product they are assigned to is worthless then their work is worthless. If they lose their job at a worthless company making worthless products, they can eventually find a job at a worthwhile company making worthwhile products.

And so the economy doesn’t spiral down to zero, despite the fact that a bad economy means fewer sales which means business have layoffs which means less money spent which means fewer sales which meas layoffs which means fewer sales.

It doesn’t? Well, damn. I wrote a cookbook for just that eventuality. Good thing I didn’t quit my day job.

Why? The risk rating of our Treasury might change, forcing the U.S. to offer higher rates of return, but other than that, there’s no reason to think the economy would collapse. It would just make it more expensive to borrow. One thing to remember is that in order to import goods, Americans need money denominated in the exporting country’s currency. Foreign investment in the U.S. is one of the things that keeps providing us with that money.

The OP appears to be suggesting that there is an impending depression that will be caused by…what? Exactly? Is Fanny Mae really hiding its losses in shell companies like Enron had done?

Economies ebb & flow, rise & fall, and frankly, nobody really knows what causes it. There are egregious examples that can be identified; e.g., the monetary and trade policies that gave us the Great Depression. I don’t see anything in this thread suggesting a depression-scale downturn. And to be honest, one of the world’s biggest economic threats are the Smoot-Hawley wannabe’s, like Lou Dobbs and his ilk. That sort of protectionist nonsense is a real threat because of the effects it will have on trade. In terms of monetary policy, the Fed is well informed and far more knowledgeable than it was in 1930.

May personal debt and higher gas prices cause a recession? Maybe, maybe not. But we’re not looking at collapsing into reliving the 1930s. Maybe the 1970s, but even that is awfully unlikely because we know the long-term shape of the Phillips curve. Yes, there’s going to be a recession, but to claim a total collapse, we need much better evidence and analysis.

And, I for one, am looking forward to all the babyboomers retiring. It will be great for the job market, and when their housing goes up for grabs as they engage in the old-person-lifestyle-downsizing property sale, I’ll be able to buy at a good price.