The Forecast Calls for Debt
Well, first I want to wish all of you a very Merry Christmas and a Happy New Year. It has been a pleasure and privilege to serve this community for the last 23 years, and we are all truly blessed to live in this undiscovered mountain paradise!
That said, it is also the time of year when I like to look ahead and give you some of my economic forecasts for next year. That also means it might be worth taking a look back to see what predictions I made and how accurate I was. Since a lot of my forecasts for next year are carryovers from last year, let’s walk through the track record, shall we?
Last year, I told you we were in a financial “credibility crisis.” I said we needed to have complete transparency of these “too big to fail” (TBF) banks’ true financial balance sheets made public—including their offshore and previously off-balance sheet items. I also said that we needed to see large numbers of criminal prosecutions for the fraud which has enveloped the financial system and caused this mess. And I predicted that the credit markets would remain predominantly frozen until these two things were done.
So how’d I do? Well, so far we have done neither. In fact, all of the remedies applied so far have done nothing but reward the very same frauds who created this Great Recession. To be fair, I had a decent year of production, as did my industry in general. “So doesn’t that mean banks have opened up” you ask? “Well … not so much,” is the real answer.
Last year the Federal Reserve (the guys who print our money), provided a budget of $1.3 trillion just to buy mortgages. Over the course of 2009, they provided over 90 percent of the funding for all mortgages nationwide. However, that program expires in March 2010 and is not expected to be renewed. Similar programs were instituted to fund student loans, cars loans, and such. In other words, the government might as well have been lending the money directly to the public. However, that wouldn’t have allowed them to stuff even more of our money into the TBF banks’ back pockets. And what about those credit card letters we’ve all been getting? Nationwide these banks have reduced available credit to consumers by an estimated $2 trillion this year. Does that sound like progress to you? Nope, that still sounds pretty frozen up to me.
Next year, I see more of the same from these TBF banks. The “Toxic Asset Auction” we were promised last July never materialized. The banks refused to participate and sell or settle their derivative’s exposures—and the Treasury and FDIC failed to get these toxic assets off of the banks’ balance sheets as promised.
Now, $3 trillion dollars later, the government is starting to run low on bullets. The annual budget deficit has more than quadrupled in the last 12 months, and the national debt will reach nearly $14.5 trillion by the end of 2010. That is approximately 100 percent of our annual GDP, which is a higher percentage than during WWII! Unfortunately, I don’t see any end to this current spending spree in 2010. There was over $11 trillion in emergency government funds set aside for this calamity in 2009. That leaves at least $8 trillion to go—and have you ever seen a politician who didn’t spend more than was budgeted? In fact, you may have noticed Congress is actually attempting to raise the nation’s “debt ceiling” another $1.5 trillion as I write. So it doesn’t take a degree in astrophysics to predict the government will continue printing and spending money at the same furious pace for most of next year.
I, likewise, predicted the failure of HAMP (the Home Affordable Modification Program). Early this year re-defaults were running in excess of 36 percent. By the third quarter, that number was up to 62 percent. Apparently it is so bad now that the Administration has refused to release that data, as of last month. That is a real worry since they have pushed the TBF banks into enrolling over 650,000 consumers into this program. Perhaps I should upgrade that to “complete and utter” failure?
Lastly, I posited that we were being told a fairytale—a fairytale that says all this government spending has somehow mitigated the problem, when in fact, it may only be postponing the inevitable and making matters worse. By worse, I meant that we would still have to go through the same pain, but for a longer period of time than we should have. And by using this failed methodology for a second time in history (see New Deal for details), I was worried that we would devalue our currency to the point of grave concern.
So how did that prediction work out? Mmm … the dollar is down another 6 percent on the year (13 percent since March), and a whopping 38 percent since 2001. In fact, the dollar is now the “carry trade” currency of choice internationally—something that used to be the domain of countries like Mexico and Argentina. Now go ahead and imagine what will happen when they finally stop printing and spending our money. Does anyone really believe that consumer spending will have recovered by then?
Okay, so what does all this add up to for Colorado? Well, the good news is that our unemployment rate is 6.9 percent and down from a peak of over 8 percent. That’s much better than the 10 percent national figure. Further, Denver’s housing market appears to have put in a bottom, as far as prices goes. The mountain communities should likewise stabilize late in 2010, though remain sluggish. The second wave of stimulus moneys will be spent on “shovel ready” projects, and that, along with all the other government spending, will artificially keep GDP in positive territory again for 2010.
But by mid-year, I expect a few new problems to appear. Several states will need Federal bail-outs after tax receipts disappoint in April. Likewise, I expect some of the TARP banks to need additional bail-outs. We may even see some who have repaid TARP come back begging, as losses mount on commercial and consumer defaults nationwide. Using the tactics currently being employed and barring any substantial change in direction from the Administration, the dollar will continue to slide. That will force foreign investors, at some point next year, to demand higher yields on our Treasury debt. At the same time, the Federal Reserve will likely have to begin raising rates and start withdrawing its liquidity programs. And 2010 should see a spate of new taxes appear, both on the state and federal levels.
Higher taxes and any inflation will create a drag on consumer spending, which will not have recovered unless we see a real employment turnaround. However, I don’t see how companies nationwide will begin rehiring when there is so much legislative uncertainty. If you run a company, you have health care costs up in the air, with cap and trade, inflation, and higher taxes looming. And political will in the face of overwhelming debt will eventually curtail government spending by the end of the year. Finally, financial reform looks like it is designed to merely coddle the TBF banks. So lending will remain predominantly frozen again next year. That leaves consumers spending in the tank without government spending to replace it any longer. Nationwide, folks are already working to pay off their consumer debt, as rates and fees go up ahead of the new credit card laws. At this time, I don’t see any way that a double-dip recession can be avoided in 2011.
I really hate being the bearer of this kind of news. I do believe the economy will heal eventually. Demand worldwide will return, and we have great companies in this country. Colorado has a lower unemployment rate because we have a diverse economic base and a highly educated work force. Our state budget deficit has been greatly mitigated by the effect of TABOR (Taxpayer’s Bill of Rights). And, relatively speaking, we should see the eventual recovery here ahead of almost anywhere else in the nation. Until then, I suggest you get your financial house in order and prepare to weather the higher interest rate environment that is surely coming. A refinance to consolidate all your debt may make very good sense. Ask your CPA and then get going. If you are a buyer, you won’t get a better opportunity than right now. The current combination of rates, home prices, and tax incentives will likely not be seen again in our lifetimes.
