Ok, folks, in recent days I’ve come across a plethora of bad information about the economy and we need to get real about this issue.  Seriously, our government would have you believe you have nothing to worry about.  Even in the face of brutal statistics they are just now admitting a recession MIGHT be on its way and their brilliant plan to avoid this ‘minor inconvenience’ is to dump $150 billion into the pockets of American consumers.  This is nothing more than a public relations stunt to distract hardworking Americans from the realities of our economic situation in order to manipulate votes.   

In case you’re not familiar with the details, yesterday afternoon, our leadership announced an economic stimulus package that would give most tax filers refunds of $600 for individuals and $1200 for couples plus $300 for children. The tax rebates are capped at an income level of $75,000 for an individual and $150,000 for a family. There will be $50 billion in business tax cuts – businesses could immediately write off 50% of purchases of plants and other capital equipment. To deal with the mortgage situation, the package also raises the limits on mortgages that Fannie and Freddie can purchase to as high as $725,000 from the current $417,000. 

First, before we even get into the ridiculousness of the stimulus plan, let’s establish that the situation is far worse than anything you see on primetime news or read in a Yahoo headline.  There isn’t just one factor at play here, but we’ll start with one of the biggies.  Home prices are down in 85% of the country in the past year and in all 20 major cities in the past three months. On average, they are down nearly 7% over the past year (the whole amount they fell from 1989 to 1992). There are over 1 million excess residential housing units vacant for sale across the country that is putting relentless downward pressure on home prices.  As of today, there is a 9.6 month supply (real estate inventory) of unsold properties on the market.   

This is HUGE.   This is the most broad and pronounced deflation in residential real estate since the 1930s-40s. Prior episodes of housing deflation (and this is much worse) – 1970, 1974-75, 1980-82, 1990-91 – have ALWAYS led to consumer recessions.  Housing is not JUST 5% of GDP. It is a $23 trillion asset class backed by $10 trillion of mortgage debt; nothing on the planet is as big as that. It is almost 40% of household net worth and the collateral backbone in the financial system. Looking at the current demand-supply gap, it is likely that another 20- 30% slide is still to come. That alone, through the effect on household wealth and spending, would trim real GDP growth by an estimated 1.5% this year and next. 

But then there’s the credit fiasco.  Right now, Americans are collectively carrying over $50 trillion in debt.  Approximately $2 trillion of debt in the private sector was created in the past six years over and above what would have been consistent with “GDP” growth.   Our government has racked up a $9.1 trillion debt, 25% of which is owned by foreign governments.  Did you HEAR that?  Foreign government own ¼ of our debt and that number is growing every day.  Additionally, the total US debt will likely rise to $59.1 trillion in order to keep Medicaid, Social Security from going bust.  In 2006 alone,  your government spent $406 million (of your money) in INTEREST to carry this debt.  This debt is NOT backed by some REAL collateral (like gold) that we could just cash in to clear our name.  In 1971, our government abandoned the Gold Standard and turned the dollar into a currency where they could print as much as they desired at a stiff price to the American consumer in the form of inflation.  In the 10 year period between 1995 and 2005, the REAL VALUE of a US dollar plummeted 50%.  You may have noticed that what you could buy with a dollar in 1995, now takes two dollars.  This is partly due to the poor spending habits of our leadership, as we’ve run in the RED for seven years since the record Clinton surplus of 2000.  Just for comparison, the total debt of ALL third world countries is estimated around $1.3 trillion.   

The corporate puppets have been pointing to the GNP and low unemployment to distract us from truth, but employment conditions are now starting to deteriorate. In December, private sector payrolls fell for the first time since the 2003 jobless recovery and the unemployment rate, while still “low”, is starting to rise in a visible manner and at 5% is considerably higher than the 4.4% rate it was at last March.  I don’t have time to get into the specifics about the GNP and how it does not accurately represent the economic conditions in this country, but regardless, even our precious GNP has taken a hit in recent weeks.   

And this economic problem is not limited to our borders.  There is no denying that we ARE a global economy and we are dependent on each other to make this work.  World markets are increasingly unstable and showing signs of collapse.  Japan is flat on its back; the UK looks to be in disarray; we are seeing weakening economic data out of the rest of Europe (negative industrial production in 4Q for the first time since 2001?) and a rigid central bank there (and Spain is really hurting right now as its housing bubble unwinds in spectacular fashion); Canada just printed its first employment decline in four years. 

So, that being said… don’t put your faith in our leadership to turn this ship around.  It is no accident that we’ve come to this predicament.  Our government has been selling us out for years.  A $150 billion stimulus package is like throwing pebbles at a tank.  Literally, that’s only two-tenths of 1% of our $17 trillion dollar economy.  And the reasoning behind it is just wrong.  Even if American consumers received a trillion in tax rebates, it’s still like playing the lotto. Because what is the likelihood that Americans are going to continue to dig themselves into a spending hole as we enter a recession?  If dutiful taxpayers immediately took their checks on a shopping spree, the vast majority of the products we buy are imports and even the products we supposedly make here are comprised of mostly foreign materials.  Our Congress might as well sign the check to China and keep the Wal-mart heirs from getting an edge on Bill Gates.   Nevermind that those folks who NEED the most help don’t even qualify for the handout because they can’t file tax returns.  The only remotely helpful suggestion I’ve seen from the talking heads is GOP candidate Huckabee’s idea to sink the $150 billion into highway construction in America.  (GASP!  Did a flaming liberal pagan just give kudos to a Bible-thumping, conservative nut-job?)  No, really, at least Huckabee GETS it, even if his solution would be like pissing in the ocean when it comes to IMMEDIATE relief.   

And did I mention PEAK OIL?  That’s an even scarier monster that hides under the bed of American financial stability.  I’ll reserve comment for a separate blog, as it is deserving of independent attention.