Compelling evidence of a second great depression
On September 16th, 2009, Federal Reserve Chairman Ben Bernanke declared that the recession was over. He is completely correct. The recession has ended, and is transitioning into a full blown depression. The second great depression will be easy to see in hindsight, once we are well into it. What factors can be observed that might allow a glimse of its existence now?
While the Wall Street Journal cited a few reasons for the declaration of a recovery, that with manufacturing showing signs of growth, and stabilization emerging in the housing and retail sectors, consumers may finally be showing signs of a turnaround. With each new media 
observation of “green shoots” of a recovery, such as in June of this year, I have always pointed out that these were not durable event. Sure enough, barely two weeks after claiming gains in manufacturing, housing, and consumer gains, the news this week contradicted each of those.
Manufacturing: First, Reuters reported yesterday that factory orders fell 0.8% “unexpectedly”. On an annualized basis, that is a 10% drop if the rate keeps up. So much for signs of growth in manufacturing.
Housing: Next, any stabilization in the housing market is an illusion. Major consumer surveys show a gloomier outlook for home buying now than even last spring. Shoppers are less likely to want to buy a house now than ever, according to the poll. What makes this worse, is the “shadow
inventory”. There are currently about 4 million homes for sale nationwide. This already represents about an 8 month supply of homes, at current sales rates. The first problem is the current sales rate is artificially inflated by low interest rates, and the $8000 buyer credit currently available. Neither of those two factors are sustainable. The real problem is the shadow inventory of homes that are not wanted by their current owners, but not currently offered for sale. Banks are sitting on millions of properties which are in some type of loan delinquency, and are slow-playing the foreclosure process. There are numerous reports of borrowers living in homes without making mortgage payments for two years.
According to the Wall Street Journal, the volume could be extraordinary. “There’s going to be a flood [of bank-owned homes] listed for sale at some point,” says John Burns, a real-estate consultant based in Irvine, Calif. When that happens, Mr. Burns believes, home prices will fall further, particularly in markets with large numbers of foreclosures. Overall, he expects home prices to decline 6% next year. Ivy Zelman, chief executive of Zelman & Associates, a research firm based in Cleveland, believes three million to four million foreclosed homes will be put up for sale in the next few years.
That figure alone could double the current inventory, but it could be much higher. I have found a mortgage industry analyst trade document published last week which concludes that the number of lurking inventory could top 7 million homes, and does the math to prove it. It is a technical read, but the conclusion is clear. The paper also points out that this figure was only 1.27 homes just 3 years ago.
Three million, or seven million, either way the problem is significant. This does not include homes which are owned for cash, or non-delinquent, which the owners want to sell but are not listing them due to market conditions. Banks are also NOT wanting to foreclose on the delinquent loans themselves. Doling out the distressed inventory at a manageable volume, which can be digested by the market might seem like a good idea on paper. The problem is the sales rate is nowhere near the level needed to liquidate the troubled assets before their value deteriorates due to a further depressed market, and literally decompose due to abandon, neglect, or destruction.
Consumers: Last, as I wrote yesterday, consumers cannot consume without income from employment. About 1-in-10 Americans are “officially” unemployed already, with millions more constructively unemployed or underemployed. The real unemployment rate is often quoted as nearing 20%. If laid-off workers who have settled for part-time work or have given up looking for new jobs are included, the unemployment 
rate rose to 17 percent, the highest on record. Even the “official”unemployment rate would have topped 10 percent if the labor force hadn’t shrank, as older, laid-off workers are dropping out and requesting Social Security at a faster-than-expected pace. How can this lead to any kind of a “turnaround” in consumer spending?
Each one of these 3 factors taken individually is a knock-out punch to the staggering economy. Taken together, they ensure mutual decline of each other, and guarantee the Second Great Depression which has already started.
While prominent news stories suggest an end to the recession, and recovery imminent, there are some examples of Aware Brains. Peter Schiff yesterday declared that a “jobless recovery” is impossible. Among his observations were that having 17% of our able-bodied population sitting at home or working part-time at Cinnabon indicates that our present policies are weakening the economy. Also hitting close to home was his noticing that while Americans are focusing our economy on consumer spending, much of the rest of the world was saving for the future.It reminded me of my article about China the other day.
He also notes that the sense of panic from last falls economic catastrophe has temporarily subsided, watching Americans taking the government’s bait by spending money they don’t have to buy things they can’t afford because of tax credits and clunker money.
Former Secretary of Labor Robert Reich writes a blog which this week indicates he might have an Aware Brain. In a particularly insightful piece titled “The Truth About Jobs Nobody Wants To Tell You About”, he connects the same dots we have been discussing here, that jobs and commerce are obviously mutually required of each other. In his words, “..businesses that don’t have customers aren’t going do a lot of new investing. And without customers, companies won’t hire. They’ll cut payrolls instead. Which brings us to the obvious question: Who’s going to buy the stuff we make or the services we provide, and therefore bring jobs back?”
Exactly. This is as simple of an understanding that is needed to figure out where we are headed. It does not seem to be acknowledged on a widespread basis. Most of the masses appear to be going about their daily routines apparently unaware of this looming disaster.
One reason is something Reich says is a possible next step of the process: government intervention (or interference, depending on your point of view). “There’s only one buyer left: The government”, he says. “The federal government should be spending even more than it already is.”
While he admits that the government has no money wither, and would have to go into debt to pay for these expenditures, he makes the argument that “Our government is already deep in debt. But let me tell you something: When one out of six Americans is unemployed or underemployed, this is no time to worry about the debt.”
His reasoning is that we went into debt in the 30′s and 40′s to cure a recession and fight a war, and paid it off during the 50′s. All correct facts, but
it overlooks the reality that the country had legitimate and world-leading manufacturing industries during the beginning of the 20th century. We enjoyed a commanding lead in world exports. He have none of that now, and no prospects to recreate any.
Cinnabon, anyone?
[...] In October of last year, I wrote that there may be as many as 7 million homes lurking in a “shadow inventory” waiting to pop out onto the [...]