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A different kind of recession

It may come to the hot-dog-business as well (via aturkus, Flickr)

“A lemon crisis – but is it `Rated R`?” I asked back in September. The answer today it is: Yes, it is a recession – just wait for the next statistics about consumer spending in the next couple of months.
But, there is a big “but”. As others have noted before, it will not be a recession like the previous ones: As Kevin Depew points out, this is not only a liquidity, but also a debt crisis: Too much debt is supported by too little (housing) value and income generation.

The problem: With mortgage-prices in a downward-spiral, the Banks’ assets are not worth as much as what has been written in the books. This means the banks not only have to write off their uncolllectable subprime loans – they have to correct the value of their assets, too (= write down). That spells double trouble, as there is much less money to lend, be it to consumers, companies, investors or other banks.

The more they have to write down, the bigger the problem becomes, because the banks have to keep assets as a reserve for…loans going bad (ironically, this is why the SIVs came up in the first place, because they helped to keep risks off the balance sheets). This comes along with a consumer-climate that has been attenuated by high oil prices and ascending consumer prices because of a rising inflation.

The stimulus that will be announced by the American government, if well done, might be enough to cool the price-heat for some (but if the measures become long term, the federal deficit might grow even further, continuing to weaken the Dollar and leading to more inflation). The Fed lowering the interest rates, though, does not help the banking system a lot in this situation, because it only helps them to cope with their own debts. The asset-devaluation constricts the banks (rightfully so, I have to add), so they can not put up enough assets to countervalue to their credit-lines. The further the mortgage-prices get back down to their “real”value, the more the banks are tightened.

This could mean companies with the business-model that scream“less capital, more credit”might not be able to cover their debt with new credits. For the consumer, this could lead problems with covering credit-card debt: Statistics about already show more and more Americans have problems paying their credit-card-bills; more harm for consumer spending at the horizon in the next couple of months, maybe already in weeks.

Still, we could be up in a mild recession, if the housing market does not go downhill too fast. But, as Bill Fleckenstein put it: We have run out of bubbles. The structural problems of the American economy will continue to become clear this year, and foreign investors and mergers might be the only way to help some of these banks back on track. For consumers, an even toughter time lies ahead.

Ein Gedanke zu „A different kind of recession“

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