After The Great Recession

The Great Recession

Our most recent economic downturn is being called the Great Recession. We're just now starting to finally see some signs that we are in a recovery mode. Still, we have a long way to go to really see any real results, and getting back to the healthier economic times we came from may be even farther away—if we can get back to that at all. The fact is that since the beginning of this recession, the United States has lost around 8.7 million jobs. By all accounts, if we were to expect to be back to where we'd started, we'd have to add at least those jobs we've lost. That's not accounting for any growth by the way.

In March, it was reported that the economy added around 162,000 new jobs. But, the reality is that if you discount the 48,000 or so jobs that were added as a result of the census bureau hiring temporary census workers, that means we actually only added 114,000 new jobs. In February we added 150,000, so actually the new March numbers would suggest to me that jobs growth actually slowed slightly.

The big nut is, of course, consumer spending and unemployment figures. Unemployment has been fairly steady around 9.7%. Still, looking at real unemployment figures, which account for those who have given up the job search, have run out of unemployment benefits, or have had to take on lower paying jobs to replace their old one, that number is much higher. Probably more like 15%-17%. It stands to reason that consumers cannot spend, and will not spend if they are unemployed, or underemployed for that matter. Unemployment numbers and consumer spending numbers are one in the same.

DOW 11,000

Even though before the proverbial shit hit the fan, the Dow Jones Industrial Average, which tracks 30 top companies across a broad range of sectors, was at an impressive 14,000 or so at its peak, its recent break into 11,000 territory is a significant one. Especially if you consider our low points when we bottomed out around last March. We've come a long way, to steal a phrase. But that is largely a market recovery rather than a sign that the economy as a whole is well on its way to a recovery. Until jobs numbers can sustain adding about 150,000 new jobs, according to most economists, each and every month, we're not going to be able to claim any real victory just yet.

Still, I'll take any market advances as a sign of at least some confidence in the economy being restored. Investors who see bleak earnings in the future, or see any sign of a forthcoming pullback are going to be reluctant to put their money into the markets. Additionally, there's still quite a lot of money on the sidelines, and as confidence continues to build, more of that money will funnel in, and provide necessary capital for businesses to grow and create jobs when the time is right to do so.

So, if the economy outside the markets isn't necessarily quite out of the woods as far as a recovery goes, where's the growth coming from? How do we get to 11,000?

Much of it has to do with companies having used the Great Recession to slash jobs, cut salaries and wages, reduce benefits, and in some cases even raise prices on the goods and services they sell. This means more money in the coiffures. They've also been able to take advantage of growing their businesses in other parts of the world where there is actually quite a lot of growth—China, for example. So, that helps to improve bottom lines.

Credit largely got us here

What really got us all here to begin with is many fold. It's a very complex web of too much risk, too much credit, and too much confidence. The word naiveté comes readily to mind as well. Nobody thought the great money ride was ever going to come to an end. So, everyone had a role to play in the demise of the economy. We have to remember that.

The government certainly had its role. I mean, the housing market got out of control largely because of Fannie Mae and Freddie Mac, and this whole idea that everyone deserved to own a house. So did the large banks have a role, who took on way more risk than obviously they could handle, and a lot more risk that the government forced them to take. Yeah, banks invented derivatives, asset backed securities, and all these other fancy terms that basically had the economy sitting on the edge of a high cliff with a strong wind blowing at its back. But those were largely put into high use to curtail some of the risk of subprime lending. But the American people also have a role in this through the extensive use of credit.

The fact of the matter is that between 2001-2007, as housing prices soared, Americans were virtually using their houses as ATM machines through refinancing deals, which lowered their monthly expenses, and because housing prices were skyrocketing, people had ever growing equity which, at the end of the whole refinancing process, often left loads of new money on the table that could be used to buy cars, computers and other electronics, take vacations, and even bought second and third homes. On top of that, credit cards were being issued as fast as the cards could be pressed and approved, and that just meant more money for the consumer to have access to and spend on whatever they wanted. Money was cheap. Money was available. There seemed to be an endless stream of capital.

It's not that much unlike the stock market crash of 1929. While it wasn't the consumer with too many credit cards and overextending themselves who bit the bullet there—those things were largely unavailable back then—the average American definitely suffered as the Great Depression soon followed that infamous historical day. But it was largely credit that blew it all to pieces. Credit, called margin, extended to Wall Streeters, for the purpose of buying more shares of stock than their own money would permit. There were big gains to be made buying stock on margin, and so long as stocks kept going up and they were comfortable they could carry the margins, then all was fine and good.

Those margins, as the market began to stagger, began to be called in. People who had margin accounts were forced to come up with the money to pay their margins back. The only way you can cover a margin is by selling off the underlying securities. And so it went that as people began to panic and sell off their stocks to pay back their margins, the stock market went into a freefall.

This is exactly what happened in the subprime markets. Sometimes you could have as many as three or four banks all having money on a single mortgage, and when things got ugly and panic ensued, banks started asking for their money. When everyone is asking for the same money at the same time, somebody starts to run out of it, and so goes the collapse.

We need an attitude adjustment

After the Great Recession we are going to have to have an attitude adjustment when it comes to credit. I think we're going to have to have an attitude adjustment with regard to a lot of things. You can throw our thinking about jobs in there, and certainly wages, and we have to admit to ourselves at one point or another that a service economy is not a sustainable one. We are going to have to restore at least some industry in America if we want to prosper as a people. We're also going to need to demand more made in the U.S.A. goods on our shelves as well, to help send the message that we won't settle for more American workers being kicked to the curb to save a few pennies at Walmart. Sure, American made goods may not be as cheap. Cost of living may indeed rise. But that's okay. If we are all working, and earning, and prospering, we'll all be able to afford any premium that goes along with that.

We want cheap. We don't want to have to have cheap. Let's make that point abundantly clear. And furthermore, if we are going to have a global economy, and everyone is going to get a benefit from that, let's make sure that they (the foreigners we've given our jobs away to) are buying as much from us as they are selling to us. Whoever said we could actually have our cake and eat it too? It's just not reality.

The plastic plague killed wages

One argument I've been making for quite some time is that part of the reason we have stagnant wages in this country, and certainly it fits into my previous attitude adjustment argument, is largely due to credit having effectively replaced the need for the working American consumer to grow his wages. It makes perfect sense to me. People who are consumers obviously need money in order to make purchases. The difference is that in the old days, people obtained that money from a job. They worked. They received a paycheck. They made purchases with the money they earned. But somewhere along the line, this all changed. Banks, who before would not lend to people who didn't have money suddenly realized as wages were going up, and while the economy was strong and seemed to be growing quite nicely, that people they wouldn't ordinarily lend to, could potentially be a gold mine. Installment pay is where it really got started, and once that ball got rolling, there was, of course, no stopping it.

Bob Hope used to joke, "A bank is a place that will lend you money if you can prove that you don't need it." That joke, of course, became obsolete, and banks fast became an empowering extension, and in some ways, the source for driving American consumerism.

What this meant was that wage growth could slow down. It didn't have to grind to a halt. But it didn't have to increase as rapidly either. And so long as a person's standard of living could be maintained what did the wages matter? Would the average worker have even noticed that their wages weren't moving much? They had more stuff. When they looked around them, never mind their bank accounts or their paychecks, things looked great. And, hiring companies knew there was no need for wage growth if credit could be offered to increase a consumer's purchasing power. They knew the dupe would be an easy one. Perhaps it's possible that really, the last big manufacturing job in America was, in fact, the very manufacturing of artificial economic prosperity.

At the end of the day, so long as purchasing power was strong, consumer demand could be strong, and so the cylce of the economy could go nowhere but up. Demand would be there to support jobs which would support the ability of any individuals who did extend themselves to pay those debts back—even if the gap between what you earned and what you could buy through credit was slowly widening beyond anyone's full comprehension of it.

Come to think of it, isn't this really what Bernie Madoff did? How's about Ken Lay or Jeff Skilling? Mr. Ponzi himself? At some stage of the game, which was probably right about the time the economy started to hit a brick wall, we all saw first hand that the entire underpinnings of the economy were all but a sham. Nobody really had any money. But everyone sure owed a lot of it to somebody else. Nearby lay the cash cow, dead as a door nail.

An illustrative reflection

When you look at my father, or my uncle as an example it sort of illustrates a little bit of what I'm talking about when it comes to wages, even if it is a more recent example. Pardon me in advance for beating a dead horse here on wages, but quite frankly a lot of people have what I argue is a false notion that wages are just fine. In fact, some argue, that some people even make too much money. Especially when we're talking about those know-nothing dummies who work on assembly lines. It's not an entirely fair assumption, and I'm completely leaving out my thoughts on the rate of increase in executive pay vs. the average worker—there's just not enough space here, and so I'll spare you my rant.

This credit thing really started taking off, of course, in the 1950's. But if you consider average earnings in say, 1975, it was around $14,100 per year. Today, it's around $40,500, or just a little less than 3 times what our fathers and our uncles made.

In 1975 the average price of a new car was around $4,250. Today, you'll need to shell out around $27,900 or roughly 6 1/2 times what a car cost in 1975. In 1975 a house cost $39,300. That house today would cost an average of $258,000, or again, roughly 6 1/2 times what that house cost in 1975. In 1975 the Dow Jones Industrial Average was in the 800's. By the time we hit our peaks it had risen to 14,000, or nearly 17 times what it was in 1975.

My illustration is simply to point out that while the economy was definitely in a massive growth mode, with the markets on a steady rise upward—granted, with a few hiccups along the way with a couple of smaller recession periods in between, one of which I should note, incidentally, was actually in 1975, when unemployment then was also around 9.2%—wages didn't have much movement at all. The cost of a car, or a house rose 3 times more than wages did between 1975 and 2009. It stands to reason that if the stock market had risen 17 times it's 1975 numbers to 2009, it was largely due to consumer spending. People were spending their money on goods and companies were making profits which reflected in the stock price, and the markets rose. That much is clear. A lot of money certainly was changing hands in order to drive numbers up in that way.

But where was it coming from? Economic growth? Better jobs? Higher education? Sure, people were working. Sure, jobs were plentiful. I've been in factories since I got out of the Navy in 1996, and guys who I've worked alongside on the production lines, who were on production lines in the 1970's, also talked about how easy jobs were to come by.

"You could literally get fired from one job at noon and have a new job by 3 o'clock that same day," one co-worker told me. Sounds like good times to me.

What fueled that growth was credit. Not prosperity. Not real prosperity. With higher credit lines and more borrowing power, that's how a person could only see his wages increase by 3 times, and still be able to afford purchasing a car that was selling for 6 1/2 times more. That's how that same person could also afford to purchase a house selling in 2009 for so much more than it did in 1975.

The logic is that so long as credit could be made available, wages were insignificant. Who needed money from a job if a credit card could cover the difference? Who needed to worry about a wage if the value of your house would increase at twice the multiple than your wage did? Things would cover themselves. Things would take care of themselves. And so long as things were taking care of themselves...

You could be fired from one job at noon and have a new one by 3 o'clock. No problem's folks. All is fine and good. Everything is covered.

The sad truth

The sad truth is that in the aftermath of this undeniable disaster, I'm still hearing so much about credit and its importance to the economy, and to our recovery. I'm not suggesting that all credit is bad. What I am suggesting is that credit is not the answer. Go back to my argument about wages, and about needing a return to American labor. All of that really is also about the restoration of a middle class in this country. It's about the restoration of real economic growth and prosperity.

We don't want to be Japan, but we can't spend everything we earn either

A guy who I worked with, who was a temporary employee at the time, who was also a retiree from Caterpillar told me once, "the problem is when I was working back then we made $10 an hour and we spent $5. Today people make $10 an hour and spend $15."

My thinking is that had those guys who played with margin in the 1920's had something to fall back on. Had they had real money to cover their play money, perhaps when the shit did hit the fan, they might not have been totally out of harm's way, but they'd at least have been held up a little bit. The same thing could have been the case with our more recent economic situation. Had people had real money to cover their debts, perhaps there would have been less of a freefall when things really got ugly.

I'm not saying we should sock everything away. We still should be able to live and enjoy our lives, and let's face it. We work hard. We want to play. We want nice things. But at some point we are going to have to resign ourselves to the fact that we need to be prepared for an unexpected rainstorm. We need to free ourselves from the banks and the credit card companies. We need to focus on America, Made in America, and wages. The thing to do now is not to wait for the credit cruch to end. The thing to do now is use this as an opportunity to start over. To change our mindset. To adjust our attitude about credit.

We went too far. That much is clear. We got way ahead of ourselves.

Start now with the 80/20 rule

The fact remains that most of us will not earn what we did before the Great Recession. Many of us have had to downsize our own lives. We've had to sell our homes, we've had to trade down our cars, we've had to stifle our vacation travel, our eating out. Our lives have been drastically altered. The access to money we enjoyed before simply is not what it was.

Therefore we have an opportunity to also readjust our thinking and slowly begin to return to living below one's means. Follow the 80/20 rule. That is, determine what 80% of your net pay is (I say use net because we never see gross), and live on only that. Put the remaining 20% away. And then apply this rule to everything else in your purchasing, especially the big ticket items. I call it the compound 80/20 rule, which, if applied properly, over time actually reduces the 80% figure and increases the 20% figure. If you can afford a $20,000 car, start looking for a $16,000 one. If you can afford a $200,000 house, start looking for one at $160,000.

One final argument and then I'll get out of your ear—this has been a long rant

We all complained when the credit card companies suddenly jacked their rates up through the roof. How dare they do this to us we yelled. People were angry and rightly so. We need to remember this after the Great Recession. We need to remember how we positioned ourselves to be at their whim. The banks, the credit card companies, they all had us by the balls. What could we do? You couldn't transfer the debts. No one was issuing new credit. You couldn't refinance the house to pay back the debts. Your house was worth less and no banks were issuing that kind of lending as well for the most part. And most importantly, you could not repay the debt, because rather than using credit to leverage appreciable assets, we used it to leverage depreciating ones, and so most Americans had virtually no savings to tap. So what do you do? You get mad. You make phone calls. But at the end of the day you either suck it up and pay the 15%-20% they now want you to pay, or you throw in the towel and file for bankruptcy.

We have to change our thinking. We have to be responsible. After the Great Recession we cannot simply go back to the way things were. It has been proven to be unsustainable. It has proven to be disastrous.

We cannot expect that the government to be there to bail us out, or even the big boy, fat cats on Wall Street or in America's boardrooms. Who's bailing who out by the way? That money the government gets to bail anyone out is going to come out of our pockets no matter who you tax, or how much you tax them. Think the big boys will all have to cough up more? Probably. But who pays their taxes? You and I, of course. When they pay more, prices go up. Wages go down. Benefits go down. Jobs get moved out of the country. Rich people didn't get rich by giving their money away, folks.

We pay. So, we need to think hard and long about the future of things. We need to think about what we can do to right things. After the Great Recession we have to come away from it having learned something. Otherwise history may just repeat itself—again. And you know what they say about third times being a charm.