It is interesting to read all of the so-called experts predict when and how the economy will recover. The Obama folks are, on the one hand, saying "be patient"; while assuring us that "all of the pillars are in place for recovery" this year. Warren Buffet seems confused by it all. The Boston Globe, with a complete void of innovative thinking, believes that "innovation" will get us back to where we were and the recovery will happen as soon as we start innovating. The financial experts the Chicago Tribune rounded up think that it will come roaring back … soon, for the very well thought out reason that it has always come back in the past.
(Note that I don't really expect anyone to actually click on all those links and read all of the drivel I cited – the links are only there as proof that I don't make this stuff up.)
I'll tell you what I think about the economy's recovery – it's never coming back. And that is good news. I think that we have crossed a credit Rubicon – passed a point of no return, as it were.
For the economy to return to its old levels, credit has to get as loose as its old levels – and if God is smiling down on us that ain't gonna happen. While all of the noise has been about the housing market, credit for people who don't deserve credit has dried up everywhere. And that is a very good thing in the long haul.
There are something north of 20 million kids going to college in the US these days, and the credit card vultures who have been waiting for them at the campus gates – and often paying kickbacks to the colleges – have folded up their card tables and gone home. They never should have been offering credit to kids living off of mommy and daddy's money and the mother's milk of government in the first place. But at an average of about 2 grand per kid on credit cards that weren't paid off for a very long time – if ever – times about half of those kids falling for the easy money sales pitch offered by the credit card companies … well you do the math. That's a few billion worth of Ipods, Hollister gear, music downloads and beer pong supplies that aren't going to be bought until the credit cards come back. And the credit cards won't come back until Wall Street can line up more fools to pool their money and buy that high interest, high risk debt from the credit card companies.
An important fact to keep in mind is that, when the economy tanked like this in the early '80's, total credit card debt in the US was about $71 billion. Now it is north of a trillion bucks. 14 times more credit card debt today is hardly a reflection of a fourteen-fold increase in American thrift and self discipline – the keys to handling credit. That 14X increase is largely a reflection of the fact that you could borrow money – and never pay it back. Just keep rolling it over to another card with a higher limit; and when that ran out, get a second mortgage on a house you bought with nothing down and pay it off with that.
Same with cars and houses. The US and Europe have collectively been living off of far more credit than most of us deserve. If this economy is going to return to its old levels, then someone has to re-open the credit purse and give car loans again for 100% of ridiculously inflated blue book values to people with credit scores of something less than 600. I don't see that many rich idiots out there willing to go down that path again. And without the rich idiots to back the deal, there will not be 16 million new cars sold every year like the good old days. Some of those lousy credit risk folks are going to have to settle for Nikes instead of Chevrolets while they save up for a down payment.
In order to buy things in a credit environment with a touch more sanity than we have seen in the last few decades, people will actually have to have jobs … and enough money in the bank to make a down payment … and a track record of paying their bills.
Instead of measuring himself on the percentage of Americans who were home owners, Mr. Bush would have served us better by shooting for a higher percentage of people who deserved to be home owners.
Tune in tomorrow for how this gloomy scenario is actually great news for lean companies, and the death knell for those that are silly enough to think that the world will ever be the same.