THE RESTLESS MISCREANT: HYPERDEFLATION. NO, ITS NOT A REAL WORD… YET.

Shift to today and we see that Dick and Jane have been dragging in $75-100K, sharing it with their 2.2 children in the McMansion with the granite countertops.  Their ARM will be resetting higher soon in the face of a principal balance in excess of the value of the house, and the home equity loan that paid for the swimming pool and children’s playground has long been tapped out.  Add the car loans for the SUV and the minivan, plus the large balances they’ve run up their credit cards trying to stay afloat, and that will come to, let’s see, a lot more than they will ever be able to pay back even if only one of them loses their job, which is probably imminent.  And, just to sour the pot a bit more, their 401 is on its way to a 101k.

 

To add insult to injury, the virtually moribund banks are cutting credit lines and increasing rates and fees of all kinds in an effort to overcome their own prior excesses and stem further losses; presumably, they hope that those that can still pay under their usurious terms will have no choice but to comply or lose their credit ratings.  And, of course, the recent changes in the bankruptcy laws will help keep the consumer in perpetual economic servitude, the ultimate result being the creation of a nation of financial zombies.  An insolvent consumer cannot spend and an almost defunct bank cannot afford another deadbeat. 

 

The inevitable result of this is exactly what we’ve seen so far— a massive decline in consumption accompanied by a swing to savings.  What’s different from the period after the 1929 crash is the speed with which the downward spiral has been proceeding in a deadly feedback loop: lack of credit = lack of spending = business failures = loss of jobs = less spending = more business failures = more loss of jobs, etc.  The fact that the economy contracted at a rate of 6.2% in Q4 2008 (vs. 13% for the entire period 1929 – 1933) portends the most rapid deflation in the history of the world, quite understandable since he world has never had a leveraging of credit anywhere near the heights achieved this time around.  Hence hyperdeflation.

 

The economic rescue and stimulus packages now in play are, of course, an attempt to overcome these forces, stabilize the financial and housing markets, and return us to prosperity.  The problem is that, even given the stupendous numbers involved, it’s all too little too late.  Dr. Nouriel Roubini, the NYU professor known as “Dr. Doom” who has been right about all this from the beginning, has concluded that a minimum of an additional $2.6 trillion would be necessary to stop this disaster from continuing.  And that’s not even allowing for more “Black Swans” such as the looming disaster from wholesale triggering of credit default swaps (see my article “Vertigo” in the Holiday 2008 issue for clarification) or the impending financial collapse of some Eastern European countries and banks which threaten to bring down Western European banks and, undoubtedly, ours in turn.

 

And, as the cost of the attempted “reflation” threatens to balloon further, where will the money come from?  Let’s not forget that, unlike the 1930’s, the U.S. now is broke and getting broker and that we depend on the “kindness of strangers” for our next meal (China, Japan, etc.). If they should suddenly balk at loaning us money virtually interest-free as they have been, we face the unpleasant prospect of higher interest rates to attract capital in the middle of a depression or monetizing the debt and destroying the value of the dollar (I think you can guess which one Mr. Bernanke and Mr. Geithner would choose).  So, as we grope onward through the fog, many rich will become poor, some middles rich, and most of the poor will get poorer as usual.  At some point the country will start over from the bottom up, the way true prosperity has always worked.  Just call it “the every-three-generation reshuffle.”  And now, to tickle your sphincter a bit more, I’ve put together some interesting recent statistics on NYS and NYC.  All figures are approximate:

 

 

Spending increased about 40% from 2004 through the current fiscal year.  There is a $1.5B deficit right now, prejected to be $12.5B for 2010, $15.8B for 2011 and ////417.2B for 2012.  That comes to $47B between now and then,

 

20% of tax revenues come from financial companies and the take is estimated to be $6.5B lighter over the next 2 years.  In June of 2007, the 16 banks paying the most taxes sent $173M to Albany.  In July 2008 they sent $5M.

 

Private sector job losses between 10/08 and 12/09 are estimated at 160,000 and another 65,000 for 12/09 to 12/10.

 

The Pension fund, which had assets of $154B as of 3/08, lost $30B (about 20%).  It has $124B now.

 

The unemployment fund has the dubious distinction of being the first in the country to go broke, necessitating loans from Washington of $90M per week.  That’s the better part of $5B a year, and the maximum benefit is $405/week, the lowest percent of an average paycheck than any state except Alaska.

 

 

The budget deficit over the next 3 years will be $18B according to the official 2/09 forecast.  The securities industry, which had profits of $10-20B in previous years, had a loss of around $25B in 2008, a net change of minus $35B to 45B.  It normally contributes 27% of direct tax revenue, accounts for 9% of total private sector jobs and 1/3 of payrolls.  (“Daddy, what will happen when the mill closes down?”)

 

A 2/09 forecast calls for a loss of 243,000 jobs citywide through 12/09, including 82,000 financials.  Don’t forget to remember that in 2006 the average Wall Street bonus was $475K and that 3 or more other jobs are dependant on each one of those folks.

 

Listings of apartments for sale in Q4 2008 rose 39%.  Average prices realized in Q1 2009 are expected to be off 15%.  A rush to the exits can’t be far away.

 

Homeowners over 60 days late on mortgages were 3.8% in Q3 2008 and projected to be 6.2% in Q4 2009, a 63% increase.  Also, foreclosures in 1/09 were up 64% from 12/08.  Parts of Queens have some of the highest foreclosure rates in the country.

 

The residential rental vacancy rate 1/09 is up 67% from 1/08 (2.24% vs. 1.34%).

 

Residential construction contracts are off 70% for 2009 and cancelled development projects are expected to be down at least $5B.

 

Co-op and condo owners are starting to take a hit from higher taxes, owner defaults on common charges, declining flip tax revenue and retail units leaving.  This has translated into higher monthly charges all over the city, as much as 15-20%, and things could get a whole lot worse.

 

Commercial space leasing is off 19% for Q4 2008 vs. Q4 2007.

 

The 3 biggest employers downtown, AIG, Merill Lynch and Goldman Sachs, currently occupy 13% of local office space.  More than 12M sq. ft. of new space is expected to hit that market in the next 6 years, resulting in a huge vacancy rate spike.

 

Madison Avenue boutique space has a normal vacancy rate of 6-8%.  It’s 15% now and rising rapidly.

 

Tourism is expected to decline to 44.5M people in 2009, 5% fewer than in 2008.  Most of the drop will be in foreign travelers who spend 4 times what U.S. tourists do.

 

Broadway revenues are down almost 20% from the same time last year.

 

Personal bankruptcies in the metro area went from 11,700 in Q3 2007 to 16,000 in Q3 2008.  The number of residents applying for food assistance has increased almost 33% over the past year. 

 

The economic downturn in the early 1990’s saw 800 homeless families per month moving to shelters.  In 9/08 the number almost doubled to 1500.  In the next issue I will present my personal diatribe on the past, present, and future.  Stay tuned!