Time For A Nice Long Recession - I Hope

Last year I posted on what I referred to as the new reality. I talked about people becoming more frugal, less prone to using debt and more living within their means. During the depths of our troubles last year this came true. Consumers were hunkering down and, despite the dire times and unemployment, saving money. Certainly some government dollars helped people to start saving instead of building debt, but at least the attitude seemed to have shifted to a - pay down debt and start saving - attitude. Unfortunately, it was or may have been short lived.

The government is hell bent to get everyone spending again. This, my friends, is idiotic. We have spent virtually an entire generation spending more than we make, all the while with our incomes shrinking and our domestic economy less able to support our ways. There are numerous reasons for this debt driven generation and high on the list are low interest rates and lenders willing to lend to anyone who can fog a mirror - or can who can at least lie and say they can fog a mirror. Debt has skyrocketed on a private and public basis throughout the world and now we have a huge ass price to pay for it all.

Yet we are not paying the price. We are allowing our governments to incur record levels of public debt to keep the spigot flowing. And the government is promoting us to continue our spending ways. This, folks, is freaking insane.

I write this as I have a six year old daughter and a three year old son. I am truly, truly worried about the world we are leaving them. This is on many fronts - financial, environmental, energy, etc. But this blog is about financial issues, so let me focus there.

Let me start by linking a post that I highly, and I mean highly, recommend you read. At a minimum go there and look at the incredible charts. They tell the story, and the story is that we - on a private, government, financial or combined level - are heavily in debt in record proportions to GDP and most of the world is as bad if not worse off.

http://www.nakedcapitalism.com/2010/04/the-origins-of-the-next-crisis.html

We, folks, are hanging on by fingernails simply hoping interest rates do not rise. If the do, we are all screwed big time. If they don't, if we are lucky we are only screwed small time.

So let's get back to the story. Easy credit and low rates can only sustain us spending beyond our means for a limited time. When we incur debt we are simply buying stuff today on tomorrow's income. So what if tomorrow's income goes down or is nonexistent. What if our incomes stagnate and we cannot afford the new debt when we have to pay principle.

And so I return to the point of this post. For at least a generation we have bought stuff - be it cars, appliances, houses or whatever - on low interest debt. The "reality" is that you cannot maintain an economy based on debt based purchases. So now we have the reality that we need to start buying what we can afford - be it cars, appliances, houses or whatever. Unfortunately, we have a couple of very spoiled generations in this country - and perhaps the world - who like living beyond their means. But so be it. It will be painful but we need to spend within our means and pay down our existing debt. This, my friends, is no fun whatsoever. This, my friends, will suck for a long time. This will feel like a very long recession. Yet this, my friends, is exactly what we need. It is our new reality. Either we need to get used to it or we will kick this can down the road again and face a much worse fate 3-7 years down the road. Our problems, folks, are not going away.

We need no more government stimulus promoting us to spend dollars we do not have. We need to stop incurring debt we cannot afford and ignore the temptation of interest rates approaching zero. We need to start saving - a novel idea - and getting ready for the problems ahead. I suspect there is a lot of pain ahead and I am personally doing what I can to protect my children from it financially. Nonetheless I am quite upset that I have to do this and the government is screwing my children's future.

What we really need is to (a) make sure we have no total financial market meltdown (done) and (b) let the recession go on for decades if need be while we pay down our enormous debt and adjust our spending to be within our means. One might think that this process would put us at an economic disadvantage to the rest of the world living off of fiscal stimulus, but I think it builds a considerable advantage in the long run. We need to not live off debt and, indeed, pay it down. It will be a long painful process and it will feel like a (less than nice) long recession. I truly think, however, it is time for us to take our medicine, even if we have to take it for a decade or more.

Just my opinion.

Disclosures: None.

Kickin' Cans

A nice ($65 billion) relief package was announced for Greece over the weekend and everything is dandy. The VIX dropped, the cost of insuring against Greece default dropped by one day records and the DOW exceeded 11,000 for the first time since 2008. And the economy in the U.S. is expanding at roughly a 5% annual rate. Yeah baby, off to the races!

You know where I am going with this of course. According to this linked post, which I highly recommend reading in full, there are still some issues with Greece (as in you can put a whole lot of lipstick on it and it is still a pig), so the plan at most avoids immediate problems and, as the post notes, kicks the can down the road. Greece's problems are by no means over and the rest of the PIIGS are being called upon to help Greece out. Now that will work well - not.

http://www.nakedcapitalism.com/2010/04/auerback-the-piigs-problem-maginot-line-economics.html

For the GDP growth in the U.S., well I might opine that just a smidge is a trillion or so in government spending, which seems to be nearly at an end, and over half of it is inventory buildup. Inventory buildup? Yes, at least certain retailers and others seem to be buying into the line that the worst is over and the economy is about to take off.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUipGJoGciA0

Now I could add to the mix some info on continuing high personal debt levels, unemployment in the U.S. still around 9.7%, an aging population (here the U.S. looks good compared to the E.U. and Japan) and numerous other considerations. We have been kicking a lot of cans and those cans seem to be getting bigger with each kick. I hope you have steel toed boots on as the next couple of kicks are going to hurt even more.

Disclosures: None