The Economic Spiral boogey man in the closet
Haven’t even really heard the phrase “economic spiral” used at all yet in these iffy economic times. But, it will certainly be used to describe our economy as things begin to worsen. I am sure FED chairman Bernake goes out of his way to avoid the term even though it is his worst fear and it is here.
Spirals of the economic sort are relatively simple to grasp as a concept, however, the magnitude and depth of one is mere speculation. Simply put, a downward spiral occurs when economic times get bad, home prices fall, jobs are lost, businesses weaken, and due to these factor, economic times get worse, home prices fall more, more jobs are lost, businesses weaken further, and the cycle repeats itself over and over until the “bottom” is hit. Of course the bottom varies by the overall underlying strength of the economy. In the 1980’s things were different than in the great depression of the 1930’s. Where the bottom will be is pure speculation but one might compare our economy to another recession/depression era to get a feel for what they might expect to see.
For instance, we might take a look at the bank failures lately and the big news of the possible insolvency of Fannie Mae, Freddie Mac which are two financial institutions always thought beyond failure. With the mortgage industry reeling from bad loans and plummeting home prices, and those prices still falling, we will certainly see more and more of these institutions fail. As they fail, jobs are lost, folks become more worried about the economy, businesses slow and fail, home prices fall and here we go again-- the spiral continues. We have seen folks rioting outside of banks wanting their money back and some are getting all but many just part. Untold banks are on the verge of the same situation especially if the economy falters further, which it is sure to do, which again fuels the downward spiral.
Where are we at in it all you might ask. Well, my not-so-humble opinion is that we are in the very beginning of the process---maybe 10 to 20% into the ugliness. I do think that our scenario is surely closer to the 1930 economic down turn than any other in recent history. Matter of fact, given that our country has exported most of the meaningful jobs to India, China, and other places and our country is almost bankrupt as it is, I tend to think that we are in much worse shape than the 1930’s.
Anyway, you can read my previous entries to see why I think this way but be aware of the elephant in the room----THE SPIRAL!