"Debt

Macroeconomists, including the current chairman of the U.S. Federal Reserve Bank System Ben Bernanke, have revived the debt-deflation view of the Great Depression originated by Arthur Cecil Pigou and Irving Fisher. In the 1920s, in the U.S. the widespread use of purchases of businesses and factories on credit and the use of home mortgages and credit purchases of automobiles, furniture and even some stocks boosted spending but created consumer and commercial debt. People and businesses who were deeply in debt when a price deflation occurred or demand for their product decreased were often in serious trouble—even if they kept their jobs, they risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.

Massive layoffs occurred, resulting in unemployment rates of over 25%. Banks which had financed a lot of this debt began to fail as debtors defaulted on debt and bank depositors became worried about their deposits and began massive withdrawals. Government guarantees and Federal Reserve banking regulations to prevent these types of panics were ineffective or not used. Bank failures led to the evaporation of billions of dollars in assets. Up to 40% of the available money supply normally used for purchases and bank payments was destroyed by all these bank failures.

Furthermore, the debt became heavier, because prices and incomes fell 20–50%, but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 banks failed. In all, 9,000 banks failed during the decade of the 30s. By 1933, depositors saw $140 billion of their deposits disappear due to uninsured bank failures. [1] Bank failures snowballed as desperate bankers tried calling in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. [2] Banks built up their capital reserves, which intensified deflationary pressures. The vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression." -From Wikipedia

I am sure I am going to get slammed for this, but what if? The actions by the Fed for the last 2 days tells me that there is a much bigger problem than previously thought.

Someone on here has to know more about macro economics than I, so what do you think? Could it happen? Are we not in a similair situation?

The reason I bring this up is I was talking with a Realtor partner I work with. I just did 2 cash out refi's and 1 rate and term on his primary and investments. After talking with him he explained that he is taking all the cash and investing it either in gold or over seas. Any thoughts?

"Trade Decline and the U.S. Smoot-Hawley Tariff Act

Many economists have argued that the sharp decline in international trade after 1930 helped to worsen the depression, especially for countries significantly dependent on foreign trade. Most historians and economists assign the American Smoot-Hawley Tariff Act of 1930 part of the blame for worsening the depression by seriously reducing international trade and causing retaliatory regulations in other countries. Foreign trade was a small part of overall economic activity in the United States and was concentrated in a few businesses like farming; it was a much larger factor in many other countries. [3] The average ad valorem rate of duties on dutiable imports for 1921–1925 was 25.9% but under the new tariff it jumped to 50% in 1931–1935.

In dollar terms, American exports declined from about $5.2 billion in 1929 to $1.7 billion in 1933; but prices also fell, so the physical volume of exports only fell in half. Hardest hit were farm commodities such as wheat, cotton, tobacco, and lumber. According to this theory, the collapse of farm exports caused many American farmers to default on their loans leading to the bank runs on small rural banks that characterized the early years of the Great Depression." -From Wikipedia

Also, I heard there will be a tax up for a vote on Chinese imports in November. Notice all the China hating in the news lately? Check out this article; http://www.reuters.com/article/politicsNews/idUSN1921934520070719
hmmm...

and this; http://www.morganstanley.com/views/gef/archive/2007/20070511-Fri.html#anchor4871

This information is great....keep sharing.

This is not my info, I'm just putting puzzle pieces together in my head. Not sure if they even fit together. What do you think?

You are starting to see the true picture of what could be in store for the US.

Go to the Yahoo finance message boards and read some of the viewpoints on Countrywide's (ticker:CFC) board. Scary as hell.

Not only US Banks have invested in US Mortgages, but so have some German Banks to the tune of 7.8 Billion Euros, and they are on shaky ground as we speak. They invested in AAA papers and are writing off losses, some invested in the sub-prime market and are losing it.
This is starting to be a global problem.

http://www.spiegel.de/wirtschaft/0,1518,499451,00.html

I just wanted to add this, which I saw in another post:

http://www.oftwominds.com/blogaug07/sublime-subprime.html

"Nervous foreign owners of dollars, U.S. mortgage and corporate bonds may decide to cut their losses and unload some of their holdings. These owners are unlikely to be persuaded by Paulson and Company's sweat-flop pleas to buy more or even hold on: China stopped buying US mortgages in May. Even modest selling could beget further selling, creating a selling frenzy beyond the control of our financial markets' handlers. Thus do raindrops become rivulets which becomes streams which join into a massive unstoppable flood."

Well as much as I wish I did, I don't speak German.

An apparently, as much as I wish I was wrong about this, it doesn't appear that way.

How does FDIC insurance work? Could that prevent another depression era?

Sorry, here it's in English.

http://www.spiegel.de/international/business/0,1518,499160,00.html

Apparently this guy sees the same thing... US a "Paper Tiger"

My fear is that the mortgage crisis will worsen and widen and that we are way over 1-2 years from recovery. Even today look at the Wal-Mart and Home Depot earnings forecast. If such a large number of people used their equity like slush funds to buy "goods" then what happens to the WHOLE economy when this money is gone? If consumer spending is 2/3 of the economy and you take away a large chunk of the 2/3 you have a HUGE correction/crash. Right? I'm no economist but the pieces I'm putting together aren't good for the economy. The talking heads, CEOs, politicians, etc have to keep Joe Public in the dark or else risk full panic like the 20's & 30's. Also, those in the know are probably in the process of diversifying into other investments and they don't want us (Joe Public) pulling out at the same time. The little people are always left standing when the music stops. (my conspiracy theory).

Anyway, I hope my house sells SOON so my equity can be put somewhere else.

Well, remember kids you heard it here first!

I'm really afraid for the US market. All this talk is going to completely sink the home market in and of itself. With the worsening stock market, people are going to lose faith and start selling and that's going to cause a meltdown.

edit: I may also completely be wrong, and hope I am! But that's just how I see things.

Just read an editorial (by a die-hard bear) that said ten trillion worth of derivates are at risk of collapsing..... ten trillion. Zowie.

Well, I'm going to err on the side of conservancy and say roughly 63 trillion is at risk, roughly the value of the US economy.

Adam,
You said:
"After talking with him he explained that he is taking all the cash and investing it either in gold or over seas. Any thoughts?"

I met with my cousin yesterday that is building condos in Costa Rica. He informed me that the money is flowing in from California and across the US from investors and buyers. The outflow to oversea's purchases is going to throw a real curve at the demise of the US market.

Thanks for all of the great information. I'm sorry I don't have anything intelligent to say, but your thoughts are really helpful.

Worsening stock market? Lowering consumer confidence?

Can someone please point me to the data to back this one up? The latest numbers I have seen show these two things on the rise.

In regard to the broader scope of the post, I cannot say that I share the dire expectations. I do think it is a topic worth exploring.

However, the markets have faced bigger challenges in the past and the tendency of lots of folks is to a) cherry pick the worst circumstances to form grave opinions and b) everyone seems to expect the time they are living in to be more dramatic/important/pivotal. If you go back and read what folks were thinking at different times in the past, they all seem to think one apocalypse or another is looming.

Don't get me wrong, I am all about the numbers and projections and seeing what is around the corner. I just don't see the tumble most seem to see. In fact, the market we are in right now is very similar to what we saw in the early '90s and to also to 2001 when the same market changes were crammed into 12 months versus 3 years.

R

I'm all about being positive too. There's a great benifit to being positive.

Do you have any data to back up your positive outlook?

What happened in 2001 that is similar to this market?

No answer (sigh)

.....guess he really didn't feel that strong about the market after all :-(

When the real estate market crashed in 1989 the S&Ls were going down the tubes due to poor/illegal investing in real estate. The same thing is happening now with the same predictions of a depression.

One of the side effects of a global market is the ability of other countries to drag us down. Another side effect is the ability of other countries to bail us out, not for any altruistic reasons, but to save their own butts.

Well, the DOW futures are down over 500 points today, and most of the global markets are down double digits. The say that the DOW could lose 500 or points and that the reason the global markets have fallen so hard is because of a fear of a US recession. Damn I hate it when I am right months in advance....

I've got to put in my 2 cents here (as a former commoditity trader on wall st)

First, everyone needs to get perspective. Most importantly the media.

1) The US Market (economy whatever you want to call it) is the largest consumer in the world. We consume 2/3 of all products produced on the planet. So from a supply and demand perspective, what will a vendor (Insert any country here) do to keep thier largest customer (The US) happy. Basically anything, if you have to extent terms, carry the note whatever, you will. You just cant lose that customer. If their sales falls, their currency falls, the dollar get stronger. The US product gets cheaper, etc..

2) The real estate market DESPERATELY needed a correction. Anyone that has been in the market for any reasonable time knew that double digit returns are not sustainable. Come on, gaining 20% in a yr?

When you had mom and dad became "house-flippers" you know your in trouble. Did everyone forget about when mom and dad were "day-traders" and they had a tip for you. That worked out well, Enough said.

3) You have to remember that there are LOTS of people, institutions and investors who are sitting on the sidelines with LOTS of cash waiting to buy on the cheap. It's just not cheap enough yet. Can you find me a positive cash flow property yet ??

4) The 2 main factors that truly effect real estate are jobs and population. With the exception of a Michigan scenario (They are in trouble) the country is going to be fine. Remember, the basics of survival are Air,Water,Food, and yep, SHELTER. People need a place to live. We continue to have a growing population (as a country) and we are still at a historic low as far as unemployment (under 5%)

Are we in for a bumpy ride, sure, but I think if we all step back and think about things for ourselves. (And not listen the media because fear is a great selling tool) I think we will get through this just fine.

That's just my humble opinion.

I can agree that perspective is key to understanding, now even more and from a different vantage point, it is widely noted emerging markets in asia, pacific rim and with few exceptions russia are the fastest growing market sectors importing raw materials to facilitate manufactered goods, not the US. The demand outstrips the US in many sectors is projected to be totally in the coming year absent crash. Commodity prices and raw building materials imports have soared in these parts of the world leaving less for the US to chase at higher prices for building. Bandits are even hijacking the material - the boats and all in the ocean! No one wants to lose a customer but with trillions in cash reserves held by these countries, they are buying into and outright US industries with ever cheapening dollars so its not losing a customer its gaining control of the product or service to dictate outcome.

2) Correction is a nice word to describe what is unfolding in markets and in RE and I can agree the filtering by mass media is another method of creating a perspective, sometimes different and many times 180 from reality. But the cycle created is another direct result of cheap money from the last economy bubble burst with a whole lot of greed. Past history and data shows societies using paper as money, always fail due to improper fiscal responsibility with an ultimate lack of confidence by the masses in the currency not backed by precious metals. What was it I saw long time ago...In God we trust all others pay cash? What will the dollar be worth next week or nest month. I don't see gold and silver as rising but that the dollar value is plumenting almost in free fall. I can agree late night TV infomercials with reality show hype is unfortunately - really believed by many wannabes, mom, dad along with son and/or daughter.

3) Lots of cash is always available with the Feds ordering the printing of it. Andrew Jackson did us no favor long ago. I can agree free markets will correct themselves when left in a vacuum; however the weak hand the Fed has to play, the plunge protection team, antics as firewalls to lower rates will only extend the inevitable crash whether it precipitates now or later in next few quarters. I can agree the numbers have to work out investing in any vehicle whether brick and mortar or the other myriad of investment opportunities. What those on the sideline have to be cognizant of is, Will they be able to access their liquid cash in a banking system when even stateside restrictions were placed on withdrawls from banks and funds not insolvent but based on fractional reserve. Look at BoA buy-out of Country Fried...the numbers I looked showed me over $248B of debt exposure for $4B....is that a good investment or a firewall to stop the wiggling domino who is the first in line to fall? Look at the CAPR funds of cities and states and their investments of recent where state and USD accounts were frozen when a few early birds who lost confidence after steep drop in SIV assets, and declining dollar value pulled their dollars out leaving the State of Florida to call moritorium. Now think about all of the unfunded pension funds previously raided by the entities who set them up. Globally in the UK this already happened at the Northern Bank and continues even with widow and childrens pension funds at UBS from reading internet media abroad.

3) Conservatism, liberalism, moderatism - whichever philosophy one abides to the fact remains in our fleeting moments as world financial power winks out, the US has resorted to selling off itself to countries to stay afloat in a rising tide. Of concern to me is the bond insurers failing now with rating write downs. Without insurers the bonds don't get sold and this creates more liquidity problems for financial markets and institutions to absorb ever more increasing losses, on top of what they have hoarded and gotten from out of country investors.

This is of course hyperbole, because there is nothing we can do about it except go into a survival mode. NAFTA, outsourcing of jobs, closing of plants through attrition or inefficiency, fracturing infrastructure and our elected officals spend spend spend our way to prosperity...it isn't going to happen and it never has. What numbers are you looking at on unemployment to indicate low rates the 29 depression? GAAP are out the window in all accounting nowadays when the statistics are skewed by ommision of data. Where are the M1 money supply figures when you need them? Without them one can go to the OMB and CAO and see the other figures showing the inflated numbers after calculation to be 15% annually. Does anyone remember Brazil and the 1200% inflation rates?

Staying calm has two side effects when the call to action is made...being left in the dust of complacency or making sound responsible informed decisions with all the information on the table. I presently see no political future in any candidates, as if we could elect a popular president without the electoral college save one, who aren't SSDD. Fine is a relative term but as a RE broker I have said the worst nightmare is having a bunch of listings and no easy way for buyers to purchase in with cash.

As for peons like me...fastening my seat belt should be left only to those in moving vehicles, planes and amusement rides.

I talked with my older brother about what I see happening and he had the perfect answer; "We tell all the countries that we owe money to to go "F" themselves, close up the borders and fix the mess ourselves". What do you think? Even if some president did something like this what would happen?

MikeD,
2/1 in Lake Elsinore Ca with a 1 bd studio in the back. Asking price of 100k, 10k down equals a payment of $750.00 including T+I. House will rent, and rent quickly, at $800.00 per month and the studio will rent at $350.00 all day long. Cash flows at $400.00 a month, down payment recovered in 25 months. If you want I can PM you with my fax number for the offer, just let me know.

buy low sell high:-)

that is the only advice i can give/shrug

Firstly, I would agree with your brother's line of thinking. Secondly, I believe it would be revolutionary in our time that many others who share the same belief of constitutionalism would be able to elect a president who could do so, given the state of affairs, rigged as they are. There is hope for america!