obese and depressed

The American public is seriously unhealthy. More than half are overweight and nearly 1 in 4 suffers from a mental illness, usually depression. How come people in the richest nation on earth are so unhealthy and unhappy?

There are ugly statistics wherever you look. Some show that all the gains society made in combatting infectious disease are now nullified by atherosclerosis, diabetes, hypertension, asthma and other conditions. Obesity plays a key role in all of these.

But maybe you think I am a pessimist and you point out that people live longer lives today than they did in at other times in history? You probably heard the average life-span of 40 years too many times. Clearly people are living longer now? But do they? If you take out infant mortality the difference is not that great.

Furthermore, the key determinants of infant mortality are clean water, sewer systems, and vaccines. By about 1950 most of these issues were solved. There are actually data showing that infant mortality is on the rise again in the US. Surely the numbers are low but the trends are disturbing.

But let's not get distracted. What is it that makes Americans so unhappy and unhealthy? How about being bombarded for hours on end with commercials that tell you how inadequate you are, how you would be so much better off if you owned this or that car, or ate this or that food, or drank this or that beer?

How about being told that in order to be cool you need a TV in every room, a blu ray disc player for every TV, cable and Tivo everywhere, the latest gadget cell phones, new PCs, a larger home, more furniture, a bigger yard, an outdoor kitchen, etc.? Hard to keep up with all of that. Work, work, work. Work and endless insecurity. You are always one paycheck away from being laid off or fired. Not to mention the ever mounting bills, the credit card debt, the home equity loan, the mortgage, the fear of losing your home, the inadequate health insurance, you name it.

Guess what America, it's time to throw out the TV. Time to stop listening to all those voices that keep telling you to buy more stuff, to eat more, to consume more, to drive more.

Throw out the TV, park the car and go for a walk.

deflation is happening right now

You know how it always takes a year or more before officials declare we are in a recession? No doubt they hope the recession will be over before they admit to it so they never have to acknowledge its existence, except in retrospect. While the country is suffering, everyone keeps on repeating, "we may be in a recession, if this keeps going, we will end up in a recession, the fears of recession run high, etc., etc."

Well, this time around there is no such quibbling. The current "recession"  has been confirmed. Furthermore, we have heard it has already lasted over a year. But does that mean officials are reverting to straight talk? Dream on.

First of all, we are NOT in a recession, we are in a depression. How long will it take before someone is willing to state that obvious fact? We are just reading the same evasive sentences with a different noun. "People fear the recession may give way to depression, there is a chance of depression, the likelihood of depression goes up, if the economy continues to slip, we may enter a depression, blah, blah."

Next, deflation is for real too. We are, right now and at this very time, experiencing deflation. We are not "in danger of, slipping into, fearful of, etc," deflation is here and it is here NOW. Everybody knows prices are going down instead of up. Everybody is expecting and waiting for them to drop further. Just try to sell something and you will see. 

Normally selling something around christmas is the easiest thing in the world. People are in buying mode at this time of year. You can sell ice to the eskimos at christmas. Not so in 2008. Not so unless you are willing to discount the hell out of things and give freebies on top of it.

Nobody in their right mind will pay full price for anything anymore. Nobody will buy items that are on sale if "on sale" means a meager 10-20% off. People expect prices to be AT LEAST 30% off and I won't buy anything unless it is 50% off. Neither should you, unless you are tired of your money.

That is deflation. Serious deflation!

Even the government's own figures show deflation is real. After extensive data massaging to make something look good, all officials can come up with is an inflation rate of 0.1% (0.2% for the optimists). But anything less than 1% inflation is de facto deflation. 

You heard it here. Look around, it is there for everyone to see. Prices are dropping like bricks from the sky.

Meanwhile, the Fed is expected to lower interest rates to 0.5%. Big deal. Last week they sold treasuries at 0%, a guaranteed loss after expenses. Investors are willing to lend Uncle Sam money for free. They are willing to pay Uncle Sam to lend money to him!

And guess what? The offering was FOUR TIMES oversubscribed. That, my dear friends, is called deflation !

the crisis explained-without equations or buzz words

The current economic crisis is easy enough to understand. There is no need for fancy (or at least fancy-looking) equations or buzz words such as "the liquidity trap." It is quite simple and also easy to see why it has not hit bottom yet and will continue for a long time to come.

It all started with housing. The bubble burst. Too many people had bought houses they could not afford, or houses they never intended to live in but were going to "flip" for a quick profit, or extra houses they did not need. More people had refinanced their existing homes to cash out equity and spend it on frivolous things that they did not need.

The whole financial system went along with this, happily making money. As time went on, the finance guys got bolder and bolder, inventing ever more creative ways to get commissions and reap benefits. They lured developers, builders, appraisers, land speculators and others into their game. Everyone was getting drunk with success, and the more drunk they got, the more risky and borderline their moves became. Quite a few stepped over the line too.

The financiers also snared local and foreign investors with complex financial arrangements. Soon enough the insurers found ways to participate as well.

Each step along the way, everyone added some leverage. More and more hot air entered the bubble. Eventually it burst. It burst with a loud pop, but because it was so large and convoluted and had some many compartments, it is still popping left and right and leaking excess as we speak. In fact there are many parts of it that are still hyperinflated and have not felt the inevitable pop yet.

Now we have many folks who lost their homes. A significant number of them counted on their home, not just to live in, but to fund their retirement and their children's education. On top of it all, many of these people also lost what meager savings they had in their retirement accounts.

Huge numbers are "underwater" with their mortgages. They owe more than their house is worth. Even if they stay put, they perceive a huge loss and many of them too counted on their home to pay for future expenses.

Everybody lost big in their retirement savings. With so many baby boomers close to retirement and therefore unable to recover easily, the trouble and the fear are widespread. 

With the loss of retirement people think they will need to work longer. But jobs are disappearing too. Even those with jobs today, face uncertainty. Those who lost their job are close to despair. Nearly everyone is without savings to fall back on so the fear of joblessness is truly paralyzing for many.

Meanwhile credit has dried up. Faced with huge losses, complicated financial instruments that are incomprehensible and likely worthless, widespread fraud, and a poor economy, nobody is willing to lend money anymore. All cash influxes are immediately earmarked to fill the black hole of losses or perceived losses and no amount of cash influx increases the appetite to lend or to spend. All the money the government doles out disappears in a black hole.

Consumers refrain from replacing items that work. They postpone expenditures, they forgo luxuries or anything that is not necessary. They cancel trips and vacations. Many make deep cuts that may even include seeking medical help. They are in survival mode. All cash provided to them is immediately sucked into their own personal black hole.

Meanwhile there is excess inventory. There are too many houses and more appear every day. Prices crater, causing more problems for those with mortgages trying to survive. There are no buyers. Nobody is in the mood to think long term. Few have money to spend, some want to wait because they think prices will fall further and a lot are cut out because there is no credit even for those with good scores.

There is also excess inventory in other goods, including non-durables. All these were produced and are produced based on projections that are now far too optimistic. Inventories grow and companies slash prices and start layoffs. That further reduces the buyer pool and leads to expectations of more price drops.

Consumers are no longer interested in discretionary spending. They are no longer into bargains. They are in survival mode. Other things are no longer in their minds. They are deaf to the siren call of advertisers. They are saving and looking to save more.

New investment is halted because nobody wants to consider it. There are no buyers, and even the dreamers have ceased to dream. Nobody wants to focus on the long haul when they fear near term disaster. People dying of thirst in the desert are immune to 80% discounts on clothing.

Additionally, bad memories linger much longer than good ones. So expect people to take a very long time to change their habits -even if they could, but most can't anyhow.

Welcome to the depression of 2008. I'll be surprised if it clears before 2015. As you can see, I am an optimist. It took over 10 years and a world war to resolve the 1930's depression. 

the P word

There is one word that is probably more upsetting to US policy makers than the trio, recession, depression and deflation. That is the P-word, or Ponzi-scheme. The reason why is that while recessions, depressions, and deflation are serious to very serious, these conditions are not seen as criminal. Ponzi schemes are. In a Ponzi scheme money is taken from the masses and funneled into the pockets of a few. Ponzi schemes grow quickly based on deception, and when they inevitably collapse, they leave many victims in their wake.

When George W. went out repeatedly to tell the world that US style capitalism and the free markets are basically wonderful and should not be discarded, he is in essence saying our economy is legitimate. Our financial systems are legitimate. They are not there to make some people rich by deceiving everyone else. They actually do create wealth. It is not a Ponzi scheme. 

Unfortunately, our current financial system is a Ponzi scheme. It does not create wealth as much as shifting it from the poor to the very rich. While most of the victims are in other countries, ordinary Americans were not ignored in this latest crisis. 

Our financial system did deceive people and it did so on a grand scale. During the 90's it valued companies with no revenues higher than some of the world's most profitable and solid corporations. In the 21st century it valued essentially worthless housing in the remote desert areas at top location rates.

Additionally, the system introduced leverage at every level. Worthless houses were overvalued by 10 fold, and these mortgages were then wrapped in securities with another 10 fold markup. Securities that were then repackaged in derivatives with yet another order of magnitude markup, and bought with borrowed money to introduce yet another order of magnitude of leverage. In the end, less than 1/100th of 1% of what was sold was backed up by reality. 

All along the way people were deceived. Deceived into believing that their house was worth more than it was. That they could pay for it with money they did not have, because it was only going to up in value and they would flip it and cash out big. Investors were told these securities were solid, backed up by ever-more valuable real estate. It goes on and on.

It was a Ponzi scheme of the vilest kind.

And while you may think this is an extremist view, I am glad to see that the most recent Nobel Laureate in Economics thinks so too. He is a man who knows.

Here is Paul Krugman, commenting on the tech bubble and the housing bubble that followed:

"Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?" 

Needless to say our financial system needs a major overhaul. It is not a legitimate system in any sense of the word. Not in its current implementation.

the dreaded R-word

It is always ironic to see how nobody wants to admit that we are in a recession. Everyone stubbornly keeps on repeating: less consumer spending may lead to a recession, the economy may be entering a recession, these events raise the probability of a recession, etc. etc. All the while hoping that by the time it is all confirmed the recession will be over. That way one never has to say the dreaded R-word. 

This time around though there is "help" from another source. It is not the type of "help" we all hope for but it is there nonetheless. We will never have to admit that we are in a recession because by the time we finally capitulate, we will be in a deep depression. That is right folks, we are entering a depression. Take it from George Soros for confirmation. He said as much in testimony to Congress today.

Since most of us are not old enough to remember a real depression, we can all be a little aloof or smug about it. It sounds bad, but it is hard to imagine that things will really get that bad now. Surely things will get better soon. Maybe Obama will save us?

I suspect "reported" unemployment may go as high as 12-15%. The real unemployment will be more like 20-25%. I also think the risk of deflation is now very high. An informal sort of deflation is already happening and luxury goods are routinely sold for 20-30% less than "manufacturer's suggested retail prices," or MSRP. 

The WSJ had an article today highlighting this phenomenon. It had an upbeat title announcing bargains to be had. But pretty soon those $80 designer jeans (down from $200+ MSRP) will remain on racks.

The poor can't afford them, pretty soon the middle class won't want to spend this much either, and the rich will have to "hide" lest they become victims of jean-jacking.

On another note, George W. went on record defending free trade. There, now you know free trade is in trouble. Once George W. has to take up its cause, the end is near. The free market is now on par with success in Iraq. We're turning the corner folks. Just hold on for a while longer.

no great depression (yet)

The financial news is split these days. On the one hand there are the headlines and front page stories telling us how bad it is and how we need to do something. On the other hand, there are the editorials and reviews reassuring us that this is not the Great Depression revisited.

To give credit where credit is due, the optimists and reviewers have more data to support their cause. But just how good is that data? We are told that during the Great Depression, unemployment stood at 25% and thousands of banks failed. In the Spring of 1929, 300 banks failed. That was almost six months before the stock market crash. In 1930, a thousand banks closed. By 1932, the Dow had lost 90% from its peak in 1929. Surely we are nowhere near these numbers.

That was at a time with no unemployment compensation, no FDIC to ensure deposits, and no stiff drinks to soften the blows. Nobody would even acknowledge that there was a problem and according to the WSJ, Herbert Hoover insisted that the "fundamental business of the country.. is on a sound and prosperous basis." Where have I heard that recently?

Surely, we must have learned something from the Great Depression? And according to Richard Quest of CNN London, we did. We did and we can rest assured that we won't make the same mistakes again. "We'll just make different mistakes," he quipped last night when the Japanese market tanked.

Let me go on record now. Our problems are much worse than they seem. The housing crisis is in full swing. One in six Californians is "under water" with their mortgage. At the time when most of the option ARMs are still in their five year honeymoon phase, where you can pay as much as you please. Well before the real crash so to speak.

Every day the headlines correct earlier estimates, and label them "too rosy." Everyday new revelations are made and all are bad to very bad. Unemployment may only be at 7% but you have to go past 7 to get to 25. If we learned anything in recent weeks, it is how incredibly fast we can move from seemingly innocuous difficulties to outright collapses.

The constant flow of information we are exposed to is not helping either. It is undermining our confidence. Many are already suffering from information overload paralysis. A lack of confidence is the key enemy of the American economy. That economy rests on consumer spending. In other words, it is unsustainable. But I would much prefer if it wound down gently instead of failing catastrophically as now seems more likely.

If half the population can no longer afford to spend money, and the other half prefers not to because they don't feel confident, then we are on a very slippery slope indeed.

I've said it before, time to buy gold. Cash is just paper, and when confidence is lost paper has no residual value.

and miles to go before i sleep

If you think the crisis is over, think again. The worst is yet to come. I don't want to sound like an alarmist, but it should be obvious to everyone now that this is true. There is simply no other way. Even if the Fed can restore normal lending in the weeks to come, the fallout from what went before, and what is underway is still to hit. The lag could be as long as six months to one year.

Banks have failed while others were taken over for peanuts. What that means is that many are out of work and soon many more will be. Of those who survived, the mergers are likely going to be followed by massive rounds of layoffs. People out of work will result in more foreclosures, and more losses. To say nothing about reduced spending. Remember, 2/3's of our economy is based on consumer spending. And much of that spending is on credit. Up to half of it comes during the holiday season. A season that is now upon us.

If the holiday spending is much reduced, and it will be significantly reduced, many retailers will go under. That too won't happen for another six to nine months. Apart from hitting pocket books, it will hit commercial real-estate. Other highly-leveraged businesses will fail soon too. Many in California got a bit of extra "help" here from the delayed budget. That budget has also pushed some cities over the brink. Vallejo went bankrupt, Oakland is considering 120 layoffs, San Francisco has problems.

Even in the mortgage arena there is more to come. The majority of the so-called option-ARMs have yet to reset. Sixty percent of these ultra-toxic loans are in California. Many have been negatively amortized for their entire life-span. So not only will people now have to pay the full price, which they were never able to, their loan balance is now higher than it was before they started.

Unfortunately, that is not the only problem. A key problem is that the recession will be world-wide. What that means is that exports will get hit and exports are -for now-the only bright spot left.

It has been said that we are a long ways from Great Depression II. As of today, there is no doubt. However, experts have been surprised before about how quickly and how profoundly things can unravel. The wizards from the Treasury, the Fed, and the Administration have all gone on record months before the current crisis, stating how solid the economy was, and how resilient the markets were.

I think it is time to buy some gold.

depression

Most recently, on August 4th, I reminded everyone of the long slowdown that was yet to come. It now appears even I may have been too optimistic. At the time, my estimate was about 12-18 months of downturn. Now I would say it looks more like 3-5 years. Yes, years. You are not reading that wrong. And even that estimate could be way off. Because we haven't seen the end of the credit crisis yet. Not to mention that some people may actually be exacerbating it right now by short selling and other devious tricks.

One thing Mr. McCain said is very true. It was driven by greed. Greed all across the board. From the top to the bottom. And that is one thing Mr. Obama has a hard time admitting. It is easy to point to the rich, but this time everyone played along. The "regular" people had a very active role in all this. Of course, the damage they did was limited by their limited resources, but given that there are so many of them, their contribution cannot be ignored.

Before we give these candidates too much credit though, it behooves us to point out that stating the obvious is easy, however painful it may be to admit to it. Doing something about it is a different matter. And here is a crisis that was decades in the making. How to undo that is not trivial. It all started with Ronald Reagan's de-regulation mantra. Yes, it does go that far back. The anti-government stance that killed regulatory oversight is the root of it all.

Remember in the late 80's when books started appearing warning us of the great slowdown of the 90's? The new great depression. By the mid 90's you may even have joined in with the chorus of nay sayers who welcomed another doomsday prediction gone bad. But chances are you forgot all about it. Or it got lost in the fake scare of Y2K. Remember that one? That was an obvious hoax.

But the coming depression was not. It was merely postponed by a series of bubbles. Things like that happen. Money and paper gains just moved around from one bubble to the next, until they ended up in housing units that are emptily bleaching in the desert sun. Or nearly-paid-off units that were refinanced so their owners could upgrade their kitchens, bathrooms, pools, and SUVs. Now all these gadgets are sitting pretty in foreclosed properties.

During those bubble years we did nothing to make matters better. Quite to the contrary, we exacerbated the problems by venturing into Iraq. By giving tax cuts to the very rich. By further de-regulating and privatizing organizations.

Our war games have made matters much worse. It doesn't so much matter whether we win or lose, whether we leave with honor or not. What matters is that we have sunk inordinate amounts of money we don't have into a hopeless endeavor, whose only "saving grace" is that it made some people incredibly rich.

The money is gone and we have little to show for it. Sure we can pat ourselves on the back and say:"we turned a corner," but in doing so we left our hard-earned cash behind.

As for de-regulation and privatization, has it occurred to you that our government is now taking over the bulk of the financial and insurance industries? Freddie and Fanny, AIG, the list will get longer, rest assured. We are "nationalizing" industries. Hopefully we will be smart enough to regulate them as well. It would be foolish just to pay the bills without reprimanding the offenders. But then again, foolish things seem to be the rule these days.