The Dynamics of a Deflationary Spiral

Goody's Family Clothing appears to be the first retail casualty of a tough holiday season. Above, a store in Knoxville, Tenn., in 2005 during better times. Photo by AP.

One problem in engineering an eventual recovery is that so much of US trade is global, whereas the US is not very competitive in the basic potential recovery strengths like manufacturing, raw materials, or labor costs, while its population is meanwhile relatively old.

By Roger Baker / The Rag Blog / December 29, 2008

This piece below allows you to see the dynamics of a deflationary spiral. Just think of the impact if 10-20% of the retailing jobs disappeared and all of the unemployed clerks cut back on their own shopping. That would be about 1.5-3 million out of work in an industry that already has a lot of retail space by comparison with other countries. Total US employment is about 138 million out of a total population of 300 million. About 2/3 of the total US economy is consumer spending.

From Retail Industry Information on About.com.

...According to the US Department of Labor, Nearly 15.5 million people worked in the US Retail Industry in Q4 2007. That number has dropped to 15.3 million as of May, 2008...

As Keynes noted, there is no inherent factor within capitalism operating so that employment comes to rest at a high level; it can come to rest in a permanently depressed state so that it is seen as a task of government to try to re-stimulate the economy above a depressed state until things turn around. But right now, it appears to be collapsing into a state of greater efficiency whereby people only buy what they actually need. This non-discretionary spending centers around food and energy, and not what the shopping malls typically sell, like jewelry and frills.

One problem in engineering an eventual recovery is that so much of US trade is global, whereas the US is not very competitive in the basic potential recovery strengths like manufacturing, raw materials, or labor costs, while its population is meanwhile relatively old. What kind of a restructured trade bargain can a debtor nation like the US strike with other countries that would prevent the dollar from being devalued?

From the Wall Street Journal:

Analysts estimate that from about 10% to 26% of all retailers are in financial distress and in danger of filing for Chapter 11. AlixPartners LLP, a Michigan-based turnaround consulting firm, estimates that 25.8% of 182 large retailers it tracks are at significant risk of filing for bankruptcy or facing financial distress in 2009 or 2010. In the previous two years, the firm had estimated 4-7% of retailers then tracked were at a high risk for filing.Retailers are particularly vulnerable to a recession because of their high fixed costs....

Store Closings: The International Council of Shopping Centers estimates that 148,000 stores will close in 2008, the most since 2001, and it predicts that there will be an additional 73,000 closures in the first half of 2009.

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US Household Worth Takes a Nosedive : How Do We Get Out of This Mess?

Updated December 17, 2008


Americans strapped for cash so they're not spending; How will the government pay back all the cash it's creating?
By Roger Baker / The Rag Blog / December 16, 2008

See 'Household Net Worth in U.S. Declines Most on Record' by Shobhana Chandra, Below.

Average Americans are strapped for cash, so they are holding back spending and causing the stock market to crash. Meanwhile the banks are soaking up free taxpayer bailout cash, but since they may be secretly broke (we're not allowed to know the details), and since the banks know that the economy is tanking, they are afraid to lend. So nothing is trickling down to homeowners or car buyers. You would have to be pretty stupid to risk buying a car from a company on federal life support, right?

One problem is that the massive amounts of bailout cash now being created and printed to try to re-stimulate the US economy eventually have to be paid back by the government. How do you suppose the US government (broke as always) will end up paying back all this newly generated public debt, which they have used to buy up bad bank debt and to try to restore confidence to credit market lenders and thus stimulate the US economy (even though the problem affecting the US is global)?

Do you think the feds will end up paying back its treasury note lenders with big healthy dollars that will still buy a lot of stuff like they used to do?

Or do you think the the feds will pay it back with little bitty deflated dollars that have shrunken in value because they must ultimately depend on US wealth and taxpayer affluence as the long-range source of their value?

Household Net Worth in U.S. Declines Most on Record
By Shobhana Chandra / December 11, 2008

U.S. household wealth fell in the third quarter by the most on record as property values and stock prices tumbled, highlighting the tattered state of consumer finances even before the most recent slump in lending.

Net worth for households and non-profit groups decreased by $2.81 trillion, the most since records began in 1952, according to the Federal Reserve’s Flow of Funds report issued today in Washington. Real-estate-related assets declined by $646.9 billion, three times the prior quarter’s drop.

Combined with the loss of 1.9 million jobs so far this year, almost half of which occurred in the last two months, and the slump in bank financing since the credit crisis intensified, the figures darken an already gloomy outlook for consumer spending. President-elect Barack Obama has called for a stimulus package of unprecedented size as the economy slides toward the longest postwar recession.

“This is not pretty,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. “It’s going to take a long time to repair balance sheets that are being severely impaired.” Feroli estimated wealth will drop by about another $4 trillion this quarter if stocks stabilize at current levels and home prices decline at the same pace as in the third quarter.

Household net worth dropped to $56.5 trillion, the lowest level since the last three months of 2006, from $59.4 trillion in the second quarter. The decline over the 12 months ended in September, at 11 percent, is the biggest year-over-year drop since records began, exceeding the slump caused by the bursting of the bubble in technology stocks in 2001.

Consumer Slump

Consumer spending will probably decline 1 percent in 2009, making it the biggest drop since 1942, according to the median forecast of economists surveyed by Bloomberg News this month. The economy is projected to shrink for four straight quarters, the longest contraction since quarterly records began in 1947.
The Fed switched home-price measures to better reflect the slump in property values and revised its calculations to 2000.

The central bank adopted figures supplied by LoanPerformance, a unit of Santa Ana, California-based First American Corp., that track a wider range of properties, including those financed by subprime and jumbo loans. Previously the Fed used a price gauge provided by the Federal Housing Finance Agency that excludes those homes.

Owners’ equity as a share of their total real-estate holdings dropped to a record-low 44.7 percent last quarter, from 46 percent in the second quarter.

Mortgage borrowing by households fell at a 2.4 percent annual pace, after decreasing at a 0.1 percent rate in the prior quarter, the Fed said.

Government Borrowing

Total borrowing by consumers, businesses and government agencies increased at an annual rate of 7.2 percent last quarter compared with a 3.1 percent gain the prior quarter. The increase was led by a jump in government borrowing.

Total borrowing by households fell at a 0.8 percent pace after rising 0.6 percent in the second quarter. Business borrowing climbed at an annual pace of 2.9 percent after rising 5.6 percent the prior quarter.

Borrowing by state and local governments increased at a 2.9 percent rate, the Fed said.

Federal government borrowing surged at an annual rate of 39 percent, more than six times as much as the prior quarter’s pace.

Job losses are making consumers more strapped for cash, and worsening the slowdown in consumer spending, which accounts for two-thirds of the economy.

A Labor Department report today showed the number of Americans filing first-time claims for unemployment benefits surged to 573,000 last week, a 26-year high, and the number of workers receiving benefits also jumped to the highest level since 1982.

Source / Bloomberg

Also see New Poll Shows 63% Are Already Hurt by Downturn by Michael A. Fletcher and Jon Cohen / Washington Post / Dec. 17, 2008

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