The more I think of it, the more I can’t help but believe that we’re on the verge of an economic collapse on par with The Great Depression.
The American economy is built on a house of cards. Consumer spending makes up two-thirds of our GDP, which means we’re not a productive country, like how we were in the years following World War II, but that we’ve become a country of consumption and, most importantly, debt.
Most people are living beyond their means, buying things they not only don’t need, but can’t afford. For the last two years, and probably this year as well, the country’s net saving has been negative, meaning people have been spending more money than they’ve been earning.
On top of that, you’ve got seedy lending practices that helped perpetuate the housing and credit bubbles. These exotic loans were fine when the value of the house behind the loan was increasing 15% a year, but this growth certainly wasn’t expected to last forever. There’s a reason the saying “what goes up must come down” has been around for so long – namely because it’s true. Now we’ve got hundreds of thousands, if not millions, of people who owe more on their house than what the house would fetch out on the market.
Couple this with the fact that they’re facing higher mortgage payments on a house that’s losing value and you’ve got yourself a housing epidemic of unimaginable proportions.
That’s not to say that this is all the lender’s fault. Nobody held a gun to the borrower’s head and told them to take out loans that they couldn’t afford, or use creative financing to get into a house that was much bigger than what they needed. Many borrowers knew better, took a risk and got burned.
Regardless, falling housing prices will be catastrophic for the American economy. We’ve been pulling out our imagined wealth in the form of home equity and using the money to fund our purchases. What’s going to happen when this money is no longer available?
Finally, we have a global economy that is built on the belief that energy (specifically oil) will continue to be inexpensive as long as we need it. Our world runs on oil. Slowly but surely, demand has overtaken supply and since there’s no foreseeable drop in the demand for oil and there’s no foreseeable increase in supply, the cost of continuing the world’s growth oriented style is going to increase exponentially.
In two or three years, $80 for a barrel of oil (which recently happened for the first time) will appear amazingly cheap. Unfortunately, the only things that could prevent an energy crisis would be 1) vast economic slowdown throughout the world and/or 2) a decrease in the world’s population. If you get a chance, check out Soylent Green, a 1970’s Charlton Heston disaster flick, because it may very well be a glimpse of the future.
Don’t get me wrong, I understand that markets and businesses go through up and down cycles. My concern is that we’ve been in an up cycle since essentially 1991 (with the exception of a few months following the dot-com bust and 9/11) so I can’t help but think that we’re overdue for an equally strong downturn. And because of the things that I’ve pointed out, I’m afraid that this downturn is going to be more of an economic depression than a recession.