Stagflationary Abyssal Part II - More Evidence and Suggestions for What to Do

More Evidence

While I don’t want to overdo citations that support my viewpoint, I think my readers should know and probably want to know that even more evidence has come out that supports my conclusions that we are heading for dire economic times. Just to review from my last article, when I look at past economic downturns, I look at five key components to determine how bad they were and what the capabilities and challenges were in terms of getting the country out of the negative cycle. Those five key components are:

1. Consumer savings and spending/ability to spend

2. Corporate income, health and spending/ability to spend

3. Government financial health and ability to spend

4. The lending and banking system and its ability to extend credit

5. Inflation & scarcity of resources

My general contention was/is that at any point in history since the Industrial revolution, you can look at those five areas and determine the health of the American economy and what its challenges are. I gave evidence that all five are now problematic for the first time in the history of our country.

Literally minutes after the article, more evidence came in supporting me. My previous article was released at 7:37am Eastern time on Wednesday April 2nd. Federal Reserve Chairman Bernanke testified to congress at 9:30am that morning about the strong possibility that a recession was coming. [2]. Over the next two days information came in about jobs and employment. Thursday April 3rd, figures were released [3] that showed a sharp rise in new unemployment claims. On Friday, the New York Times and others reported on a third straight month of rising unemployment rates and the loss of 80,000 jobs in March. The unemployment rate had risen from 4.8% to 5.1%, the highest level since the month after Hurricane Katrina [4].

Businesses do not cut jobs when they are doing well. That might be obvious but I think it needs to be pointed out. Rising unemployment is a strong indicator about my component #2, corporate health. Obviously, if they are losing their jobs, consumers aren’t doing well either but there was more evidence coming out on that score too. I pointed out in my original Stagflationary Abyssal article that consumers had negative savings over the last 6-8 years and ballooning credit card debt. On April 3rd, Reuters reported on a study by the American Bankers Association showing “More Americans have fallen behind on consumer loans than at any time in nearly 16 years” the report showed that the problems went beyond mortgages to sharply increasing delinquencies on auto loans and credit card debt as well [5].

I think I have proved my point that the consumer is in big trouble right now and has no ability left to spend. The economy isn’t going to be lifted out of its negative trajectory by the consumer. Businesses are hurting too and laying people off. We know about the enormous deficits the government is running and we know about the problems of the Banking and Lending industry and we know that inflation is on the rise.

This economy is in big trouble. So why aren’t we seeing more catastrophic looking indicators right now? Why hasn’t the market crashed? Unemployment and inflation are worsening but they don’t look particularly bad yet. As I responded to someone on one of the forums in which I participate, those things are coming. Right now, we are in what I would call a death spiral. If you have ever seen a model of an object that has just been caught in a black hole’s gravity, you know what I mean. At first, the object orbits the black hole slowly and at a great distance. The object is then sucked into orbits of smaller and smaller radii and the object moves around that radius faster and faster. The speed at which the radius decreases accelerates quickly. The five components all being bad at the same time exerts a tremendous negative pull on the economy and on each other. Corporations doing badly causes other corporations that depend on them as customers to lose money and causes layoffs which causes consumers to do badly which hurts retail corporations and causes the consumers to default on loans which causes the banks to suffer, when those three together have lower earnings it reduces tax revenues to the government and around and around it goes.

Suggestions

Whether it is at my day job or about the things I write, I don’t like to throw out negative predictions without offering suggestions about how to fix or at least improve the situation. Here is what I think each of the groups should do:

1. Suggestions for Individual Consumers and Families

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