News US Economy Headed for Toilet: Great Depression 2?

[gravenewworld]

The economy was in decline before Bush took office. Check the numbers.

Was it? According to the US Commerce's Bureau of Economic Analysis and the National Bureau of Economic Research, the recession began in March of 20001 and ended in Nov. of 2001, which is entirely under Bush.

Also let's get one thing correct here, the interest rates that economists refer to is the Federal Fund Interest rate, which is how much banks have to pay in interest in order to borrow money. It is NOT the interest rates you and I get from the bank to buy houses and cars etc.

Bush and Kerry are both bad for the deficits, Bush with his addiction to tax cutting and spending and Kerry with his education and health care package that is estimated to cost over 1 trillion dollars in government deficit.

3rd, the housing market has mostly seen a boom due an increase in the population in the United states. A record amount of people owned homes this year, and the year before that, and the year before that,...etc. because the population of the US has been steadily increasing.

 

[russ_watters]

Was it? According to the US Commerce's Bureau of Economic Analysis and the National Bureau of Economic Research, the recession began in March of 20001 and ended in Nov. of 2001, which is entirely under Bush.

As any Democratic economist will tell you today, GDP isn't the only economic indicator (but it is what a "recesion" is based on). http://www.lowrisk.com/nasdaq-1929.htm site gives a rather more specific date than I would, but they say the Internet Bubble burst on March 11, 2000 - nearly 8 months before the election. The stock market is, of course, a leading indicator.

And even still - what was the GDP growth in each quarter of 2000 - was the rate increasing or decreasing? And btw, I'm letting go the revisions in the GDP that were made later that show the recession itself started in 2000 - it isn't relevant to showing the overall economic downturn started in spring, 2000.

Also, since everyone knows the economy is cyclical, what (if anything) does it say that in this particular cycle, the recession was unusually soft? Is that surprsing or unsurprising considering the high was unusually high?

Also let's get one thing correct here, the interest rates that economists refer to is the Federal Fund Interest rate, which is how much banks have to pay in interest in order to borrow money. It is NOT the interest rates you and I get from the bank to buy houses and cars etc.

Yes, of course. But all other interest rates do follow it. I bought a car this year at 3.85%. I know several people who bought houses at under 5%. My parents, on the other hand, bought their house in 1975 at something like 7.5% and were told they'd likely never see it any lower in their lifetime.

 

[Nereid]

That's nice kat ... how about we ourselves look at the data? Of course we have to include Alan's (and many other economists') views too, and it's a tricky area in economics (not your average highly liquid market, plenty of distortions), but the data are the data (US figures):

- 9.4% year-on-year increase (Q2 03 to Q2 04); 6.5% (Q2 02 to Q2 03)
- 57% rise, 1997-2004 (so it's not just a one year blip)
- 126 = ratio of house prices to incomes (vs 1975-2000 average = 100), a record high; previous high was ~106
- 125 = ratio of house prices to rents (vs 1975-2000 average = 100), a record high; previous high was ~104
- vacancy rates are at their highest levels since 1965 (so the high prices aren't being driven by immigration, as the popular US myth has it)

etc, etc, etc. (The Economist, 11th September 2004 issue, Finance and Economics section, has a good article on the bubble and why the US continues to be in denial, unlike Australia and the UK, and why the myths are indeed myths; it also discusses why it's so much more dangerous in the US than elsewhere ... basically, too little room to manoeuvre, what with low consumer savings, low interest rates, and massive government deficits)

 

[russ_watters]

Nereid, though I'm saying I don't think there is a problem (and further, I think there is a major flaw in SA's link), I'll freely admit the current condition can be considered a "bubble" - in the same sense, every cyclical high is a bubble. Obviously, the bigger the bubble, the worse it is when it pops, but there are a lot worse (read: unstable) things to invest in than real-estate. I think the fact that all this money is tied up in real-estate indicates the burst won't be anywhere near as bad as if the money was all in stocks (for example).

When a stock market bubble bursts, it can be pretty life-altering: I think a lot of the reason unemployment is high today is because there are more older workers working than there should be. My parents (59 and 61) would both be retired today if the market bubble hadn't been a bubble.

But when a real-estate bubble bursts, what happens? Home values drop. That puts you in a bad situtation if you're selling, but otherwise you still own a home you can live in. And if the problem is from the cash-flow end, ie you took on more debt than you can really handle, typically that means selling your house and buying one you can actually afford - or going bankrupt but (usually) keeping the house. That's taking it on the chin, but it isn't fatal.

Besides which, once you're in a fixed-rate loan, you're in. You enter based on what you are earning today, even knowing that (hopefully) in 5 years you'll be making 50%+ more than today and really could afford to pay more then. Yeah, some of my friends are pretty debt-loaded right now, but their situation will improve with time, not get worse, assuming only that they aren't utterly worthless workers.

Also, knowing my current situation (not yet a homeowner, but soon), and that of my friends, I see a lot of people who are right on the edge of being able to afford a home, and a small help like a good mortgage deal can get them there. The downpayment (or closing costs), not the monthly payments is almost always the biggest obstacle.

 

[NateTG]

When a stock market bubble bursts, it can be pretty life-altering: I think a lot of the reason unemployment is high today is because there are more older workers working than there should be. My parents (59 and 61) would both be retired today if the market bubble hadn't been a bubble.

Considering that the price/earnings ratio of the market is still AFAIK at historical highs, that claim has limited credibility. Really, there are other economic factors that are probably contributing more, probably the same ones that led to both your father and your mother working rather than just your father. The fact is that the retirement age has been climbing and that worker income has been shrinking relative to cost of living for a long time, and pointing to the .com rush as a cause is rather silly.

But when a real-estate bubble bursts, what happens? Home values drop. That puts you in a bad situtation if you're selling, but otherwise you still own a home you can live in. And if the problem is from the cash-flow end, ie you took on more debt than you can really handle, typically that means selling your house and buying one you can actually afford - or going bankrupt but (usually) keeping the house. That's taking it on the chin, but it isn't fatal.

You know, there was a real estate burst in the US about 75 years ago. It didn't do much either.

Besides which, once you're in a fixed-rate loan, you're in. You enter based on what you are earning today, even knowing that (hopefully) in 5 years you'll be making 50%+ more than today and really could afford to pay more then. Yeah, some of my friends are pretty debt-loaded right now, but their situation will improve with time, not get worse, assuming only that they aren't utterly worthless workers.

Let's say that we get into a nightmare scenario where interest rates climb to around 10%, propery values drop 40%, and that homeowners are primarily in 20% down loans that are five-year fixed rather than 15 or 30 year fixed. Now, a homeowner is stuck because selling may well represent an unafordable loss. At the same time the drop in real estate prices is liable to push the owner into a higher interest rate situation since the debt is now larger than the value of the property. Since the homeowner's situation is systematic, this type of situation can easily lead to bank problems since the banks end up eating large foreclosure lossess increasing interest rates, and a simultaneous housing glut which drives the market down exasperbating the problem. In this nightmare scenario, the rising interest rates also sap at business increasing unemployment, and, once again, attacking the housing market.

 

[russ_watters]

Considering that the price/earnings ratio of the market is still AFAIK at historical highs, that claim has limited credibility. Really, there are other economic factors that are probably contributing more, probably the same ones that led to both your father and your mother working rather than just your father. The fact is that the retirement age has been climbing and that worker income has been shrinking relative to cost of living for a long time, and pointing to the .com rush as a cause is rather silly.

My parents' situation is a little more complicated than that - my mom works two-half days a week and its as much a hobby as a job. Anyway, being so close to retirement age, they probably should have had less in the market, but the market did lose a pretty substantial fraction of its value 4 years ago.

Also, I'm not sure what you base that assertion regarding worker income and cost of living: according to the census bureau, every income group has been increasing for the past 50 years or so, relative to inflation.

You know, there was a real estate burst in the US about 75 years ago. It didn't do much either.

There was quite a bit more to that than just a real-estate bubble - and the situation doesn't exist anymore.

Let's say that we get into a nightmare scenario where...

That is a pretty bad scenario, but I don't think its at all possible/reaonable.