Northman's Fury

Invest in luxuries:

Who said anything about a recession? Sometime between the government bailout of Bear Stearns and the Bureau of Labor Statistics report that America lost 80,000 jobs in March, Lee Tachman spent roughly $50,000 last month on a four-day jaunt to Miami for himself and three close friends.

. . .

He is hardly alone in his eagerness to keep spending. Some businesses that cater to the superrich report that clients — many of them traders and private equity investors whose work is tied to Wall Street — are still splurging on multimillion-dollar Manhattan apartments, custom-built yachts, contemporary art and lavish parties.

. . .

“When times get tough, the smart spend money,” said David Monn, an event planner who is organizing a black-tie party on May 10 for dignitaries and recent purchasers of apartments at the Plaza Hotel; the average price there was $7 million. “Short of our country going on food stamps, I don’t think we’re doing anything differently.”

Some extreme spenders say they have not cut back on their impulse Bentley or apartment purchases because they have made so much money in the good times from the Internet, stock market and real estate. Some have been able to move their money into investments like private equity that are available only to those with extensive capital. Some rationalize cars and home renovations as “investments.” And some simply don’t want to skimp on the weddings and anniversary parties that they see as milestone events.

Seriously. It is one of those unfortunate truths that the worse times are, the more the rich feel the need to consume and spend lavishly to prove that they themselves aren't one of the unfortunate ones. Whatever else happens, luxury goods will do fine.

When historians finally get around to pegging Bush's exact spot in the lower depths of failed presidents, how the economy fared under his tenure will be one of the more important indicators. Over the last several days, there has been a good deal of data to help them out on that one.

The most glaring example of the administration's fiscal irresponsibility has been how he turned a $237 billion surplus into record deficits that look to set yet another new record this year. Even under ordinary circumstances, that kind of reckless borrowing would limit what his successors will be able to do given the need to service that enormous debt, but as fester noted, the real story is even worse than that.

. . .the real story is the declining real revenues on both an absolute and per-capita terms.  The AP reports the following facts:

The Treasury's monthly budget report showed that revenues for the first six months of the budget year, which began on Oct. 1, totaled $1.146 trillion, up 2.2 percent from last year. However, government spending was up by a much faster 5.7 percent, rising to $1.457 trillion. Both the spending and the revenues were records for the first six months of a budget year.

The 2.2% increase in revenue is in nominal dollars.  Over any year, absent either massive economic or policy shocks, we should expect government revenue to increase due to the combination of inflation and population growth.  Well right now it is looking like the Federal government took in roughly 3% less revenue in real dollars as it did in the same period as last year. 

That tosses discretionary funding down a few more notches. Part of the reason for that, is the fact that the jobless rate has grown towards a post-WWII high, and will probably get worse:

In the latest report, for March, the Labor Department reported the jobless rate — also called the “not employed rate” by some — at 13.1 percent for men in the prime age group. Only once during a post-World War II recession did the rate ever get that high. It hit 13.3 percent in June 1982, the 12th month of the brutal 1981-82 recession, and continued to rise from there.

To be sure, employment is a lagging economic indicator, and rates higher than this have prevailed after recessions ended. But this rate has arrived at a time when the government still hopes that a recession can be averted.

Add on to that grim picture, another grim reality that shows the median family income hasn't even recovered to 2000 levels.

The bigger problem is that the now-finished boom was, for most Americans, nothing of the sort. In 2000, at the end of the previous economic expansion, the median American family made about $61,000, according to the Census Bureau’s inflation-adjusted numbers. In 2007, in what looks to have been the final year of the most recent expansion, the median family, amazingly, seems to have made less — about $60,500.

This has never happened before, at least not for as long as the government has been keeping records. In every other expansion since World War II, the buying power of most American families grew while the economy did. You can think of this as the most basic test of an economy’s health: does it produce ever-rising living standards for its citizens?

Now, some people might wonder why, with the stock market doing so well, so little of that wealth managed to find its way to ordinary Americans. Cynical explanations aside, there's a big picture one that shows just how little real wealth was created as a part of that stock market "boom", the falling value of the US dollar. Reprice the stock market in a foreign currency and you can see how slow the growth really was. From the Agonist, here's a chart of the S&P in dollars and euros to about November, 2007.

You'll notice that there are a few periods. To about early 2003, the two moved more or less in tandem. The S&P goes up or down, so does the Euro S&P. It may be higher or lower, but they're moving together. From early 2003 to early 2005, the S&P in Euros stays basically flat, no matter what the nominal S&P does. Since then S&P in Euros has risen, but risen much more slowly than the nominal S&P.

. . .

At this point the lesson is fairly simple -- measured in Euros (you'd get similiar results in pounds, or with other indices like the Russel 3000 or the Dow) the market has never recovered from its crash. Nominal numbers may say otherwise, but really most of what has been happening is that as the dollar went down, stocks went up. From monthly top (August of 00) to monday's close the S&P is currently up about about 2%.

In terms of the Euro, it's down about 32%.

And all of this lovely data shows us where the US is before it enters what most economists are predicting will be a significant recession, bad enough to stifle growth worldwide. It also comes just as the first of the wave of Baby Boomers begin their assault on the Social Security system. Things are set to be much worse.

Bush managed to kick the can of this collapse to near the very end of his term, and it will be his successor who deals with most of its fallout, but the responsibility is definitely his.

Cross-posted to In The House and Senate

A quick look at the stories this morning shows a couple of things. First, that the lion's share of the $15 billion in assistance will be going to home builders, who speculated on the booming housing market and are now left with large inventories they can't sell. For the average Joe?

Families who cannot afford to repay their home loans -- the group at the heart of the mortgage meltdown -- would benefit mainly from $100 million to expand foreclosure counseling services and greater latitude for local housing authorities to use tax-exempt bonds in refinancing subprime loans.

I'm sure that will make a huge difference.

The one measure that may actually have made a big difference to ordinary families never made it into the package.

But it lacks a provision that many housing experts say could have a broad and positive effect on financially strapped homeowners: permission for bankruptcy judges to modify the terms of mortgages on debtors' primary residences. Such a provision has been sharply opposed by the mortgage banking industry and Republican lawmakers.

. . .

To some critics, the decision to leave bankruptcy reform out of the bill amounted to favoring the mortgage industry over borrowers. Under current law, bankruptcy judges have the latitude to adjust the terms of mortgages held by property speculators, but not by homeowners.

Ah well, Washington isn't about helping out financially strapped homeowners, it is about keeping the financial system from melting down, which leads to the second big point about this package: It's a pittance even compared to the amount put up for the Bear Stearns bailout on its own, one that the taxpayers are still on the hook for, not to mention all the other low-interest lines of credit the Fed is pushing. Priorities, priorities.

And on a somewhat related note, a very familiar scenario that won't help the global picture any:

Standard & Poor's Ratings Services said Europe's housing markets are finally, and overwhelmingly, turning down.

. . .

Particularly at risk are the U.K. housing market, where the financial crisis is exacerbating issues of affordability and general economic gloom, and the Spanish housing market, which is coming to terms with a largess of new homes, S&P said.

. . .

It noted that the price-to-income ratio is at an all-time high and this, combined with unprecedented levels of household debt (97 percent of GDP in 2007 compared with 59 percent in the Eurozone), calls for a significant correction.

The fun never stops.